Department of: Chair: Impresa e management Market, Regulation and Law

TITLE

Dieselgate

The regulatory consequences of the scandal and the new perspectives in

the automotive industry

RELATORE Prof. Massimiliano Granieri

CANDIDATE Francesco Rea Matr. 676311

CORRELATORE Prof. Giuseppe Colangelo Academic year 2016/2017

1

Agenda

Introduction……………………………………………………..3-4

1 The origins of the scandal

1.1 Diesel engine………………………………………………… 5-6

1.2 Volkswagen’s diesel emission inquiry……………….7-9

1.3 The role of EPA and the Clean Air Act (Regulatory

Framework)…………………………………………………10-12

1.4 European emission standards……..…………………..13-16

1.5 The illegal software ……………………………………...17-18

1.6 The causes of the scandal……………………………...19-22

2 Impact on multiple dimensions

2.1 Economic consequences………………………………..23-24

2.2 Political consequences……………………………..……25-26

2.3 Social consequences……………………………………...27

3 Who is responsible?

3.1 Volkswagen Management responsibility………....28-30

3.2 Bosch’s role………………………………………………...31-33

3.3 Customers reaction…………………………………...…..34-36

3.4 Impact on brand image………………………………….37-38

2

3.5 Similar cases………………………………………………..39-41

3.6 The Volkswagen scandal impact on its major

competitors…………………………………………….……42-43

4 The new perspectives

4.1 After the scandal, the new inquiries………………..44-47

4.2 The fault of the current regulatory framework….48-56

4.3 The future eventualities of the regulation………...57-64

4.4 Future prospects and advices for Volkswagen….65-69

4.5 The new opportunities in the Auto industry……..70-71

Conclusions……………………………………………………72-73

Appendix………………………………………………….…….74-78

References………………………………………...……………79-82

Website references………………………………………….82

Abstract…………………………………………………………83-94

3

INTRODUCTION

Dieselgate revolutionized the automotive industry. It can be considered as the

emblem of the capitalist society which looks only for profit and does not care

about the world wellbeing and its protection.

Analyzing a topic as this, does not means to disclose the huge penalties inflicted

to the guilty parties, but it means to reveal all the vile behind the scandal and find

a way to overcome the current negative situation, in terms of regulation as well

as investigating the future perspectives of the automotive industry.

The mainly involved company in the scandal is the Volkswagen Group, the most

important, for sales volume and history, and one of the most acknowledged

within the auto industry. A scandal as Dieselgate, which directly involved the

people who have bought faulty automobiles, people who were loyal to

Volkswagen brand, shows the only thing that a big multinational company aims

to: the profit. It is emblematic that the slogans of the company are: “the people’s

car” and “Volkswagen, Das Auto”. Indeed, if the company assumes that its

vehicles are made for the common people, being the brand associated with the

Excellency car (Das Auto), Dieselgate has to be considered as the failure of that

brand promise and of the ideology behind it.

The scandal is strictly related to the top of Volkswagen’s management chain. It

was the true source of Dieselgate birth. However, it is not possible to charge all

the responsibilities of the scandal to a unique person or entity, but the

investigation of all the causes needs to be extended to a broader horizon, above

Volkswagen focus.

Thus, the following analysis takes into account also the fundamental role of the

institutions in the scandal. US and European authorities are the two sides

involved in the investigations. Entities as the Environmental Protection Agency,

4

in USA, and the European Commission had a significant role in the spread and

success of the Volkswagen fraud and it is important to demonstrate what was

wrong in the policies adopted, the gaps of the regulation, and how the flaw could

be solved.

5

CHAPTER 1 The origins of the scandal

1.1 Diesel engine

Diesel vehicles give to their owners more benefits, compared to gasoline

vehicles, which lead to an increase in sales for larger car manufacturers.

These vehicles have benefits, such as:

They are more durable to cut costs of early repairs

They allow quick acceleration and powerful pulling capacity

They drive up to 30% more miles per gallon of fuel than gasoline cars and

more cost effective than hybrids

They emit lower levels of carbon monoxide, hydrocarbons and carbon

dioxide emissions than gasoline engines

Nevertheless, diesel vehicles have some disadvantages, such as:

They require many changes of air and fuel filters

They are more expensive to produce and purchase than gasoline

counterparts because of the installation of the extra equipment to meet

strict exhaust guidelines

They are noisier and slower than gasoline vehicles

Many car manufacturers had an objective during the engineering plan for new

launch of vehicles, which was to increase performance but at the same time

reduce fuel consumption and emissions to guarantee the best product for the

customers. This challenge has lead to continuous changes and improvements in

terms of engineering and investments. Volkswagen developed turbochargers to

improve combustion preciseness as well as technology to minimize nitrogen

emissions. Volkswagen’s diesel automobiles had a nitrogen oxide trap in their

6

exhaust system. A downside of the system was that it required more fuel to trap

nitrogen oxides1.

1 Stapleton, S. “Diesel engines and how VW’s defeat device worked”, Fortune, 2015,

September 21

7

1.2 Volkswagen’s diesel emission inquiry

Diesel vehicles have been acknowledged as very harmful to the environment.

These engines emitted dangerous substances such as nitrogen oxide (NOx) and

nitric oxide that, mixed with other atmospheric chemicals, could produce

damaging pollutants. Furthermore, NOx is known as bearer of respiratory

complications and cancer2.

Agencies in industrialised countries started to evaluate this environmental issue;

in particular, in US, the International Council on Clean Transportation, a non-

profit group association, made on road emission tests for vehicles. This was

something new in the regulatory emission process. California regulators adhered

to these initiatives, hoping that diesel vehicles in US emitted less chemical

pollutants than in Europe by imposing more severe standards3.

In May 2014, examinations started in California thanks to the job of the

California Air Resources Board (CARB). Volkswagen diesel models were

exposed to on road test and it was measured an excessive level of NOx emissions,

about forty times higher than the established US threshold, by researchers at West

Virginia University (see Appendix 1) . The results of the investigation in US was

that Volkswagen diesel models were forbidden to be sold by a directive of the

Environmental Protection Agency (EPA) assisted by the CARB4.

2 Gates, C., Keller, J., Russell, K., & Watkins, D., “How Volkswagen got away with diesel

deception”, New York Times, 2015, October 2

3 Ewing, J., Hakim, D., & Kessler, A.M., “As Volkswagen pushed to be No. 1 ambitions

fuelled a scandal”, New York Times, 2015, September 26

4 Associated Press, “EPA to change diesel tests to thwart VW-like cheating”, New York

Times, 2015, September 25

8

Another outcome of the US investigations was that a huge number, about 11

million, of Volkswagen diesel vehicles were equipped with a deceptive software

that allow to reduce, during emissions test, the level of NOx released. The

investigation lead Volkswagen to acknowledge that 5 million branded model

were equipped with the illegal software while the remaining 6 million cars were

subsidiary branded. It resulted that 2,1 million were Audi branded, 1,2 Skoda

branded but, especially, it is important to underlie how in that “special list” are

included models as: Beetle and Beetle Convertible (2012-2015), VW Passat

(2012-2015), Jetta (2009-2014), Golf (2010-2015) and Audi A3 (2010-2015).

These models are the most purchased by Volkswagen’s customers and the fact

that they are involved into the scandal is an important issue to consider in the

next analysis, regarding customers trust after the scandal5.

The 11 million vehicles incriminated is a number collected worldwide. In US,

the EPA revealed that 500.000 Volkswagen diesel models were equipped with

the illegal software, a small percentage compared to the rest of the world.

In Europe diesel engine vehicles represented the 41% of the entire number of cars

sold, the data exhibit how the scandal, break out worldwide, affected particularly

Europe than the rest of the world. In fact European Union had implemented a

huge campaign to subsidize and incentivize purchase and production of diesel

automobiles over gasoline vehicles. The outcome was that European countries

were the most affected by defective diesel vehicles. In detail, in this particular

rank, Germany with about 2,8 million models was at the first place; United

Kingdom and France were at the second and third position, with 1,2 million and

984.000 diesel defective vehicles, respectively. US was situated at the fourth

5 Statista, n.d, “Statistics and facts about Volkswagen”

9

position with, as known, 500.000 faulty models; finally, China exhibited only

1950 vehicles incriminated6 (see Appendix 2).

6 McHugh, J., “Volkswagen diesel scandal update 2015: Affected countries are largely in

North America, Europe, but Asia not immune”, International Business Times, 2015,

October 12

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1.3 The role of EPA and the Clean Air Act

The United States Environmental Protection Agency (EPA) is an agency of the

Federal Government of Unites States. The EPA was planned by President Nixon

in 1970 and it has the headquarter based in Washington, D.C. The mission of the

agency is to protect human health and environment and EPA’s purpose is to

guarantee that:

all Americans are protected from significant risks to human health and

the environment where they live, learn and work

national efforts to reduce environmental risk are based on the best

available scientific information

federal laws protecting human health and the environment are enforced

fairly and effectively

environmental protection is an integral consideration in U.S. policies

concerning natural resources, human health, economic growth, energy,

transportation, agriculture, industry, and international trade, and these

factors are similarly considered in establishing environmental policy

all parts of society, communities, individuals, businesses, and state, local

and tribal governments, have access to accurate information sufficient to

effectively participate in managing human health and environmental risks

environmental protection contributes to making our communities and

ecosystems different, sustainable and economically productive; and the

United States plays a leadership role in working with other nations to

protect the global environment7.

7 https://www.epa.gov/aboutepa/our-mission-and-what-we-do

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EPA had a key role in Volkswagen diesel scandal, they found, in fact, which

several Volkswagen models were equipped with a defective device that cheated

on emissions level. In November 2015, the carmaker admitted that an illegal

software affected almost 800.000 of its vehicles worldwide, but EPA

demonstrated that these numbers were lower than reality; in fact, only in US they

found irregularities in 482.000 vehicles. These results overcame the standards

established by the Clean Air Act. The Clean Air Act is “the comprehensive

federal law that regulates air emissions from stationary and mobile sources.

Moreover, this regulation empowers EPA to establish National Ambient Air

Quality Standards (NAASQ) to protect public health and public welfare and to

regulate emissions of hazardous air pollutants”8.

EPA’s investigation fostered other countries to look at this scandal. The UK,

France, Canada, Italy, South Korea and, naturally, Germany, started with

investigations about this stinging topic. All around the world several agencies,

politicians and regulators were examining the validity of Volkswagen’s

emissions testing. The consequence for the company after the emissions scandal

was that it had to recall 8.5 million cars in Europe, including 2.4 million in

Germany, 1.2 million in the UK, and 500,000 in the US. Furthermore, the

company faced a fall in its market share of a third after the scandal began.

Governments, over the past decade, supported diesel vehicles because they were

considered better for the environment compared to gasoline cars. Nowadays,

experts’ opinion is quite different and it is important to change the trend in the

future, restricting diesel cars circulation in some cities. In fact, analysts

confirmed that diesel vehicles sales were already slowing, before Dieselgate

8 https://www.epa.gov/laws-regulations/summary-clean-air-act

12

came, and, as Richard Gane (automotive expert at consultants Vendigital)

exposed, a sharp fall in demand for diesel engine automobiles is forecasted.

It is important to take into consideration that in US automotive market diesel cars

share represents only the 1% of all new vehicles sales and that this data is unlike

to increase in the short as well as in the medium term, because of the emissions

scandal. In Europe, on the other hand, the market share of diesel cars is

substantially higher, so, even if this scandal was born in US, it provoked its main

consequences in Europe. This may arise doubts on the effectiveness of European

emissions regulation and its control.

13

1.4 EU emission standards

EU regulatory framework states that Nitrogen oxides (Nox), non-methane

hydrocarbons (NMHC), carbon monoxide (CO), total hydrocarbon (THC) and

particulate matter (PM) emissions are regulated for cars, trucks, tractors and

locomotives, excluding ships and airplanes. Compliance with European

standards is guaranteed by an emission test which allow to verify the respect of

precise emission levels for different vehicles or engines. Vehicles that do not

meet the guideline cannot be sold in the European Union, but this rule does not

apply to automobiles already on the road.

The EU regulatory framework entails different directives, each changes to the

previous 1970 Directive 70/220/EEC. The most important list, where every car

manufacturer have to comply, is the following:

Euro 1 (1993)9:

o For passenger cars - 91/441/EEC.

o Also for passenger cars and light trucks - 93/59/EEC.

Euro 2 (1996) for passenger cars - 94/12/EC (& 96/69/EC)10

o For motorcycle - 2002/51/EC - 2006/120/EC

9 "91/441/EEC Council Directive 91/441/EEC of 26 June 1991 amending Directive

70/220/EEC on the approximation of the laws of the Member States relating to measures to be

taken against air pollution by emissions from motor vehicles". Eur-lex.europa.eu.

Retrieved 2011-02-02. 10 "Directive 2002/51/EC of the European Parliament and of the Council of 19 July 2002 on

the reduction of the level of pollutant emissions from two- and three-wheel motor vehicles and

amending Directive 97/24/EC". Eur-lex.europa.eu. Retrieved 2011-02-02

14

Euro 3 (2000) for any vehicle - 98/69/EC11

o For motorcycle - 2002/51/EC - 2006/120/EC

Euro 4 (2005) for any vehicle - 98/69/EC (& 2002/80/EC)

Euro 5 (2009/9) for light passenger and commercial vehicles12 -

715/2007/EC

Euro 6 (2014) for light passenger and commercial vehicles13 -

459/2012/EC

EU limits on emission standards are the most inflexible of the world. This rigidity

is completely in conflict with the uncertainty of the methods with which

emissions are measured. From 2012, CO2 average emissions of cars registered

by every carmaker (except the niche one, as Ferrari) has not to overcome

130g/km, otherwise a payment of a penalty is imposed. That situation favored

electric and hybrid carmakers. Within 2021, the average level is forecasted to

decrease to 95 g/km; at the beginning, the objective was fixed for 2021, but

German carmakers lobby got a deferment. VDA, German carmakers association,

says that if someone compare the limits in an international context, it is clear that

EU has most ambitious objectives; in fact, in USA targets are 121 g/km in 2020,

117 in China and 105 in Japan.

11 “Directive 98/69/EC of the European Parliament and of the Council of 13 October 1998

relating to measures to be taken against air pollution by emissions from motor vehicles and

amending Council Directive 70/220/EEC". Eur-lex.europa.eu. Retrieved 2011-02-02. 12 "Commission Regulation (EU) No 459/2012 of 29 May 2012 amending Regulation (EC) No

715/2007 of the European Parliament and of the Council and Commission Regulation (EC) No

692/2008 as regards emissions from light passenger and commercial vehicles (Euro 6)". Eur-

lex.europa.eu. Retrieved 2012-06-01. 13 "Commission Regulation (EU) No 459/2012 of 29 May 2012 amending Regulation (EC) No

715/2007 of the European Parliament and of the Council and Commission Regulation (EC) No

692/2008 as regards emissions from light passenger and commercial vehicles (Euro 6)". Eur-

lex.europa.eu. Retrieved 2012-06-01.

15

Today, consumption and emission of new cars are homologated with Nedc (new

European driving cycle), a test procedure on a kind of “tapis rulant” where there

are three cycles: urban, extra-urban and mixed, the most relevant of the

procedure. The examiners are private companies designated by EU that

implement this practice to analyze the consumption and emissions. Indeed, the

cycle allows to consume less fuel than in reality; this result comes from 11 km

track length, maximum power employed of 46 CV, average speed of 34 km/h,

acceleration only one time to 120 km/h, and the car is stopped for the 25% of the

time. Moreover, the legal framework is quite lax: for instance, tricks such as

blowing up tires below limits, substituting the engine oil with an extra fluid one

or disabling secondary circuits, are allowed.

In USA gasoline engines were traditionally sold more than diesel one, moreover

limits on CO2 are lesser than Europe, differently than NOx, which are produced

in a larger quantity in diesel engines. Furthermore, the consumption measurement

systems are more complex than Europe. EPA establishes federal tests and they

foresee five different cycles: city, highway, high speed (up to 130 km/h), and air

conditioner turned on (an important element because it changes the performance

and consumption). Vehicles are tested by producers themselves that auto-certifies

the results to the EPA; then, EPA give a sample to the National Vehicle and Fuel

Emissions Laboratory (NVFEL) of 10-15% of the data.

In 2017 a new procedure should be introduced, that for the first time would be

established at global level by all principals markets: Europe, US, Japan, China,

Russia and India. It is named WTLP (worldwide harmonized light vehicles test

procedure) and it would imply both “tapis rulant” system and on road procedures.

The cycle on rolls would be longer than the current one, 23 km, and better

structured, with 64 CV fully committed, average speed of 46,5 km/h and

16

acceleration at 131 km/h. However, the on road test, Real Driving Emissions test

(Rde), is not already defined.

17

1.5 The illegal software

Volkswagen employed an illegal software to overcome environmental standards

in 11 million vehicles: this passed in a “clear mode” when it identified the car

was being tested for emissions. More details about this “defeat device” are

contained in a letter from the EPA to Volkswagen emitted in September 18th.That

letter had the aim to lead Volkswagen to admit that 500.000 Volkswagen and

Audi vehicles in the US were polluting 10 to 40 times more than emission

standards procedures exhibited.

According to the EPA’s letter, several models of Volkswagen vehicles

manufactured between 2009 and 2015 and subsidiaries branded models had a

software installed in the electronic control system, that could switch on when an

emission test started. Reporting the EPA declarations, “the position of the

steering wheel, vehicle speed, the duration of the engine’s operation, and

barometric pressure, all very specific operators of an emission test, acted as the

activation switch for the defeat device. The vehicles’ electronic control module

was set to ‘clean’ mode during the emission test protocol. When the software

started to work the vehicle electronic control module ran a separate ‘road

calibration’ that reduced the effectiveness of the emission control system

(explicitly, it reduce, cheating, the revelation of NOx emission)”14.

After the scandal several lawsuits were carried on in US and in other countries;

the main accusation was that the polluted emissions undermined the lives of an

indefinite number of people. As reported by Vox.com, a general interest news

site, the amount of added NOx pollution from Volkswagen’s US sold

automobiles was from 5,800 to 14,200 tons to the atmosphere per year,

14 https://www.techdirt.com/blog/?tag=epa

18

generating premature deaths going from 5 to 27, in USA, and from 74 to 404 all

over the world, each year.

Bosch's electronic diesel control unit, called the EDC Unit 17, contains specific

algorithms to adjust fuel levels, air pressure, recirculation of exhaust gas to lower

NOx emissions, and injection rates of urea, the fluid used to break down NOx

into harmless component parts before it is emitted from a car's tail pipe. EDC

Unit 17 also is used on diesel vehicles from several manufacturers, including

Volkswagen, BMW AG and Daimler AG's Mercedes-Benz.

A study conducted earlier this year by the German government concluded that

most manufacturers were using software to manipulate toxic emissions from the

diesel vehicles, although Volkswagen appeared to be the only one to install test

recognition software.

19

1.6 The causes of the scandal

This section is going to discuss the causes of the scandal, analysing the corporate

governance attitude of Volkswagen that could have sown the seeds for the

scandal born.

There are three main factors that produced a climate for the scandal: austere

leadership style, insular corporate governance and drawbacks from family feuds

and nepotism.

The austere leadership style refers to the lack of innovative leading strategy of

the company; the only important thing was to reach profit even if the business

environment was changing. This kind of mentality was fixed by the history of

Volkswagen, a company founded by a feudal family that have continuously

driven the business.

Ferdinand Piëch, a grandson of Ferdinand Porsche, can be identified as the

initiator of that leadership style. He operated as CEO for ten years at Volkswagen

and, in 2002, became the chairman of the company’s supervisory board. Piëch

was characterized by a dictatorial and intimidating manner of approaching and

managing his employees and this way of doing influenced his successors.

In 2007, Martin Winterkorn, a Piëch “disciple”, took the place as CEO of

Volkswagen and he gave continuation to its predecessor leadership style.

Winterkorn main management characteristics were his perfectionism and

authoritarian style that lead to fear among employees and consequently lack of

communication across the organization hierarchy. Probably, the high

expectations and the huge pressure that Winterkorn had to sustain in order to

reach Piëch ambition, to make Volkswagen the world’s leading automotive

20

company, affected his leadership style, giving him substantial responsibility of

ensuring the future of the company.

The austere leadership style applied by Winterkorn concentrated all company’s

efforts on diesel vehicles rather than betting on electric-hybrid models, as, its

major competitor, Toyota, since they were giving higher profits to the company.

The leader’s strategy was to gain a higher market share in US market with the

launch of new diesel vehicles promoted as low emissions vehicle and high

performing (Appendix 3). European market was already been acquired, in terms

of market share, by Volkswagen thanks to benefits that European Union granted

to the buyers of these models. As a result of its vigorous marketing strategy, in

2015, Volkswagen passed Toyota as number one global annual car seller15.

Nevertheless, Dieselgate determined Winterkorn’s strategy failure. The leader

was unsuccessful to sustain environmental regulations opting for the

maximization of company’s profit, neglecting emission standards procedure and

innovation mentality. In fact, while competitors as Toyota and Tesla carried out

new successfully and eco-friendly business strategies, Volkswagen concentrated

its efforts only on current technologies16. Winterkorn’s goal was only the cost

compliance, limiting company’s opportunities from developing new technologies

and be ahead to its major competitors.

Volkswagen’s distinctive insular governance culture is an obstacle to prevent

repeated errors; in fact, the company already cheated on emissions standard. In

15 Gates, C., Keller, J., Russell, K., & Watkins, D., “How Volkswagen got away with diesel

deception”, New York Times, 2015, October 2

16 Meiners, J., “Piech vs Winterkorn: an epic battle unfolds for control of VW group”, Car

and Driver, 2015, April 13

21

the 1970’, Volkswagen was already accused of equipping its automobiles with

an illegal device to hide effective emission levels. The family owner company

(the Porsche and Piëch families) created a powerful government board that

passed on to future generations the mission of full employment and production17.

The centralised management power surely contributed to the scandal broke.

Volkswagen company culture lead the members of the supervisory board to take

no actions against negative conducts, as cheating on emission standards,

accepting only the directives from the top of the management chain. Winterkorn

management style was in line with this traditional company culture, thus, even if

he was recognized as the guilty party of the scandal, the real problem was at the

roots of the company.

To summarize, Volkswagen culture pave the way to the scandal because of a

clannish executive board with a centralised decision making power and an

engraved culture of hostility against environmental regulation18.

During Winterkorn’s period as CEO, the company met several problems to keep

low production costs to compete in the US market. The main issue was that the

company, accomplishing the interests of German labour unions, increased labour

force and consequently its cost. It was also another attempt to rise sales in the

short term. The behaviour adopted by Volkswagen entailed to decrease

investments in emission control technology, not complying with US government

environmental regulations.

17 Ruddick, G., “Volkswagen: a history of board-room clashes and controversy”, The

Guardian, 2015, September 23

18 Stewart, J., “Problems at Volkswagen start in the boardroom”, New York Times, 2015,

September 24

22

Nepotism was another factor that lead to the scandal and it is another

consequence of Volkswagen governance culture. An evidence of this behaviour

is the appointment as member of the company supervisory board of Piëch fourth

wife, in 2012 and since 2015. This decision lead to several doubts by many

shareholders about the qualifications and objectivity of this choice, but the

hostility was ignored by the Piëch family. The direct consequence of the nepotism

was the strict bond between the company and the Piëch-Porsche family: the

management power was always concentrated among few people belonging to the

same family. The lack of external people in the decisions making process lead to

rigidity and obsolescence in the strategic choices, since no one could provide a

different and new perspective that, in last instance, may have avoided the scandal.

As seen, these three factors lead to the scandal born, due to an anarchical

governance fixed on an old idealism of doing business. Nevertheless, this could

not be the unique reason why the scandal happened, in fact, there are other factors

to analyze, as the components providers role and the possible faults in the

regulatory framework.

23

Chapter 2 Impact on multiple dimensions

2.1 Economic consequences

The scandal lead to huge economic damage for Volkswagen. After the scandal,

the company showed a decrease in vehicle sales from 2,44 million to 2,35 million

from 2014 to 2015 with a net loss of 2,83 billion dollars, caused by a decline in

diesel vehicles sold from 40% to 30%19. Consequently, there was, at the scandal

broke, a massive stock selling with a loss in market value equal to 16,9 billion

dollars. As a UK price data firm revealed, the company diesel car value dropped

by 0,2% in September, when the scandal born, during a period where, overall,

the automotive market value was rising20.

The consistency of economic consequences of this scandal is reported by the fact

that after 15 years the car manufacturer announced a quarterly operating loss of

about 3,9 billion dollars in the period from July to September.

The recall campaign was very expensive for the company, under a directive of

the EPA, Volkswagen started a recall campaign concerning all the affected US

diesel vehicles at its own expenses, and there were 8,5 million defected diesel

cars to recall all over Europe. The cost of repairing these faulty models was

expected to be millions of dollars and this process could take more than a year.

This kind of costs are surely different between vehicles sold in USA and Europe.

In fact, because of a different regulatory framework on diesel vehicles emissions,

19 Boston, W., & Sahin, M., “Volkswagen is expected to post quarterly loss”, Wall Street

Journal, 2015, October 27

20 Boyle, C., “VW’s diesel debacle may already have hit sales”, CNBC, 2015, October 1

24

in US Volkswagen would install a new purification system in the vehicles

recalled while this procedure does not apply in Europe.

Furthermore, the violation of the Clean Air Act emission standards entailed a

huge financial penalty for Volkswagen that was estimated to be as much as

37,500 dollars for each affected model (overall, about 18 billion dollars). The

company calculated an amount of 6,5 billion euros (about 7,3 billion dollars) to

spend on compliance with US penalties, but this amount was not enough because

there were also several civil lawsuits on going that could lead to a higher

amount21.

Further losses were caused by customers’ reaction and the negative impact on

brand loyalty. Volkswagen clients were very disappointed by the stress of the

recall campaign and by the implicit costs that this scandal brought (i.e. indeed the

value of a defective car felt down, causing economic losses to the owners who

intended to resell it). Other possible costs that customers faced regarded the

performance, fuel efficiency and safety of their substituted of defective models.

Moreover, possible negative results of company’s substitute vehicles could lead

to new expensive class action lawsuits, increasing the already high economic

damage of the company.

Overall, the scandal caused an image damage for Volkswagen and the price of its

automobiles was likely to decrease.

21 Eddy, M., “Volkswagen to recall 8.5 million vehicles in Europe”, New York Times,

2015, October 15

25

2.2 Political consequences

Dieselgate lead to several political consequences in different areas of interest.

In US Volkswagen handled inquiries by the Federal Trade Commission, the EPA

and the US Department of Justice. The scandal brought to an enforcement of the

regulatory framework especially in USA, while in Europe this process is still in

progress.

About the EPA’s role in the investigation, critics argue that the agency did not

disclose the illegal behavior of Volkswagen for seven years, while researchers at

Virginia University did it. After the scandal, the EPA extended its investigations

to other automotive companies as FCA.

In Europe, the EU acknowledged the illegal behavior of Volkswagen but there

were many special interests that hindered the criminal charges and the consequent

reinforcement of the legal framework. Furthermore, not only US and European

countries started examination against Volkswagen vehicles, but even many

countries, such as South Korea, Mexico and China started investigations against

those defective models22 (Appendix 5).

Another area of interest regards the different approach between governments and

Volkswagen powerful management board. Especially in Europe, there are special

interests between big companies and government since these organizations

provide many jobs and the proliferation of the economy. Volkswagen is very

influent, principally in Germany, on the political decisions of the country and this

is the reason why the country is the only one that have brought a defensive

argument. Furthermore, the high power and importance that this country has on

22 Clothier, M., “Diesel scandal undercuts one of VW’s few strengths in showroom”,

Bloomberg Business, 2015, September 29,

26

the economic and political European Union decisions, surely affected the

advancement of investigations.

27

2.3 Social consequences

Volkswagen scandal implicated also important social costs.

The scandal damaged German economy and principally the city of Wolfsburg

where Volkswagen headquarter is located. Wolfsburg is acknowledged, with

Stuttgart, as the capital of the German auto industry and it is one of the richest

city in the country.

There is a high employment rate thanks to Volkswagen and other companies

situated in the city, which certified about 72.000 car workers employed on the

city.

After the scandal, the economy of Wolfsburg was seriously damaged. Klaus

Mohrs, the mayor of the city, was worried about a transitory hiring interruption

and a fall in corporate tax returns23. Last reporting from the company confirmed

these expectations, in fact, after the scandal broke, it is scheduled a 30.000

employee reduction all over the world and the majority of these cuts are planned

in Wolfsburg.

Another social consequence, and maybe the most important, is the implicit cost

of the health damages. As known, diesel vehicles produced dangerous pollutants

and this eventuality, in a public health perspective, could cost 100 million

dollars24.

23 Bowley, C., & Eddy, M., “VW’s emissions scandal has its German hometown facing an

uneasy future”, Wall Street Journal, 2015, October 27,

24 Selin, N.F., “One of the biggest consequences of the Volkswagen diesel scandal”,

Fortune, 2015, September 30

28

CHAPTER 3. Who is responsible?

3.1 Volkswagen management responsibility

Dieselgate can be considered as a total failure in terms of Corporate Social

Responsibility (CSR). Volkswagen applied an illegal strategy to gain an

advantage over its competitors that guaranteed it to maintain its leadership into

the market. The highest levels of the management chain were surely aware of that

behavior and its real consequences - the company was effectively injuring the

planet - were far away from the company’s CSR mission: “to sell

environmentally friendly vehicles”.

The illicit conduct concerned especially ethical principles in Volkswagen

engineering department and the outcome of the scandal was the resignations of a

new CEO, but it concerned also subsidiaries companies as Audi, where the head

of R&D department resigned, and Porsche, with the engine chief resignation.

Every responsible can be recognized and researched at all levels throughout the

company: in fact, every operator of the chain that directed the development of

the illegal software is certainly on record and every test done on the vehicles is

documented. The result is that it is impossible that CSR department did not know

that inside the company no one was following its ethical standards.

Even the head of Volkswagen CSR did not acknowledge its awareness of the

practice. All these situations lead to consider that in the company the CSR was

considered only as a marketing exercise and not as an effective department.

This assumption unfortunately applies to the majority of companies, especially

in automobile industry. A CSR chief is nominated, given an air of respectability,

and he has the role to establish a clear image to the company, despite the

dishonest is anchored inside it, as it is clear in the case of Volkswagen.

29

Furthermore, this conduct damage costumers, principally morally. They are

cheated about the way of doing business of their favorite brands that sell their

products with the unique aim of maximize their profit, in any way, even illegally.

Volkswagen conduct proves how the company did not matter about

environmental issues, since it was only concerned of maintaining its position as

the world leading car manufacturer. They had polluted the planet through its

defective vehicles, emitting forty times the legal limit of NOx, but they, and their

CSR departments, did not care about this issue. After the scandal, the effects of

Dieselgate on car owners could be compared to the tobacco industry. As millions

of smokers acknowledge that the smoke which they inhale is dangerous for their

health but they continue to do this, so car owners know about the dangers of

diesel vehicles but they continue to buy them, and their only interest is that their

cars runs faster and better. The problem is obviously inside our society.

The main concern of the CSR is to self-regulate the company and consequently

the environment around it. Furthermore, many people see CSR as a company

function that does not contribute in making profit, something superfluous or a

sort of unnecessary luxury. Thus, the real importance of the CSR concept is often

misunderstood by management or underestimate, and this could turn against the

company itself.

The Volkswagen scandal give us proof that the concept and role of CSR,

especially in big companies, should be reconsidered. The people who are at the

top of this department should be made responsible for their actions with extreme

consequences, as going to jail. In order to incentivize these peoples to act

properly, as to investigate behaviors against ethical principles in their companies,

they should be rewarded with an increase in their salary or gain of budgets.

30

In conclusion, Volkswagen CSR was unsuccessful. Volkswagen case should be

considered as a negative example for other companies and a sort of incentive to

change and rethink about the role and the functions of CSR department in their

own environment and business. Companies should consider that what happened

with Volkswagen could occur even to them. CSR’s chiefs need to think if their

companies are willing to lie and cheat their customers in exchange of a kind of

profits as Volkswagen made, considering if their board of directors is as

irresponsible as Volkswagen’s.

Volkswagen has to rebuild its image and credibility toward international

audience. The company has to admit, first, its responsibility in Dieselgate, but,

totally, all over the chain of management and not only fixing at a single

individual. Moreover, it has to apply immediately a reliable plan that really

reduce vehicle’s emissions and respect international standards. Volkswagen can

realize that plan only investing more in long-term R&D, positioning itself as a

leader, rather than a laggard, in technology development producing better eco-

friendly vehicle models.

In conclusion, the company needs to reformulate its CSR practices, reinforcing

the power of that department to immediate operate in case of any unethical action:

these are the bases to prevent any future fraud25.

25 Dans, E., “Volkswagen And The Failure Of Corporate Social Responsibility”, Forbes,

2015, 27 September

31

3.2 Bosch’s role

Robert Bosch Gmbh was founded by Robert Bosch in Stuttgart in 1886. It is a

multinational engineering and electronics company headquartered in Gerlingen,

near Stuttgart, Germany. Nowadays, the company is considered, worldwide, as

the largest provider of automotive components, measured by 2011 revenues.

Bosch’s core products are industrial goods (including drives and controls,

consumer goods and packaging technology), automotive components (including

generators, brakes, controls, steering systems, starter motors, electronics,

electrical drives and fuel systems) and building products (including power tools,

household applications, security systems and termo-technology).

Volkswagen is not the only company that could be considered responsible for

illegal behavior in the scandal. Bosch is responsible, in fact, for many of the

components directly involved in the Volkswagen scandal, including the emission

control software (the effective component that made the scandal born). Bosch has

been under investigation in Europe but no Bosch employee has yet been indicted

with wrongdoing. Furthermore, Bosch has recognized that it informed

Volkswagen, in a letter in 2007, that the car manufacturer’s proposed use of the

software provided by Bosch could be illegal.

After the scandal, lawyers searching compensation for owners of vehicles

affected by Volkswagen emissions-cheating inquiry are rising the pressure on

auto-components supplier Bosch. In 2016, attorneys representing thousands of

Volkswagen car owners in the US filed a 741 page brief in San Francisco federal

court that relied deeply on documents provided by Volkswagen to support claims

that Bosch worked “side by side” with the German carmaker giant.

32

Bosch supplied the engine control unit, which Volkswagen planned to “switch

on” automatically when its diesel cars were undertaking emissions tests. The

supplier company has revealed that it is not responsible for how its components

are incorporated into vehicles by clients.

However, the lawsuit claimed that Bosch did not allow manufacturers to make

changes without its approval, saying it was inconceivable, then, that Bosch did

not know that the software it was responsible for defining, developing, testing,

maintaining and delivering contained an illegal defeat device.

Furthermore, another factor is against Bosch: the plaintiffs’ attorney debated that

the Clean Air Act not only inhibits the use of defeat devices but also forbids the

sale of parts used as defeat devices, if the supplier is aware that the part will be

used as such.

The plaintiffs’ lawyers pushed Bosch to provide more information about the case,

but, as they said, the evidence has already showed that Bosch played a critical

role in the system to escape US emission requirements. The only missed

circumstance was that they should validate that Bosch was a knowing and active

participant in the organization to defraud US consumers.

On February 1, 2017, Bosch emitted a press release where the company agreed

to pay 327,5 million dollars to consumers in US as compensation for its role in

conceiving the illegal software. The press release reported: “Bosch has entered

into a settlement agreement with civil claimants in the U.S. in order to settle the

most substantial part of the civil law proceedings pending in connection with

Volkswagen, Audi and Porsche diesel vehicles that were sold in the U.S. The

corresponding documents have been filed overnight with the competent U.S.

court, the United States District Court for the Northern District of California.

33

The settlement agreement was concluded with the Plaintiffs’ Steering Committee

(“PSC”) on behalf of proposed settlement classes.

The agreement would settle the claims of consumers and dealers of used vehicles

against Robert Bosch GmbH, its affiliates, employees, and directors concerning

Volkswagen and Audi diesel vehicles with 2.0L engines for model years 2009

through 2015 and Volkswagen, Audi, and Porsche diesel vehicles with 3.0L

engines for model years 2009 through 2016”26.

However, in the press release Bosch affirmed that it did not acknowledge the

realities as assumed by the plaintiffs, nor admitted any kind of responsibility. It

seems that the company had decided to settle the issue in order to clean their role

into the scandal and maintain its image toward its clients.

26 Bosch press release, 2017, 1 February

34

3.3 Customers reaction

The scandal has impacted the conduct that Volkswagen and Bosch should have

toward their customers.

In Volkswagen case, the first outcome is the loss in brand value due to a

consequent lack in trust that spread after the scandal. The other result was a huge

economic loss caused by the payments that the company had to sustain. The

company has already settled billions of dollars but it has not finished yet.

In March 2017, in fact, another lawsuit against Volkswagen emerged. For the

first time, even in Germany, customers began to acknowledge that Volkswagen

with its action has damaged them. The result is a lawsuit where thousands of car-

owners were represented in order to receive compensations for damages from

Volkswagen’s behavior. It is an additional concern for the company since it could

be the beginning of a huge amount of compensations.

Volkswagen already paid an amount of 535,000 thousand dollars to US

consumers and about 20 billion dollars for car dealers’ compensation, but refused

to make any similar offer to its nine million clients in Europe affected by the

emissions scandal.

If the lawsuit succeeded, it would create additional claims and Volkswagen’s

costs to solve the diesel scandal would increase considerably. The company has

faced lawsuits from authorities and customers in many countries, but only a

limited number of plaintiffs have brought individual lawsuits in Germany,

differently from US. Volkswagen has excluded European car buyers’ demands

for compensation and denied they suffered damages, because there is a different

regulatory framework between US and Europe. The company offered, in fact,

only technical remedies for cars with cheating software.

35

On 25th May 2015, another class action was lodged in Italy, in Venice’s court.

An association in defense of Volkswagen customers (Altroconsumo), owners of

the faulty vehicles, accused Volkswagen to build their brand through marketing

and communication campaigns focused on ecological values, praising the vehicle

performance in term of emission, thus, hiding the truth. That conduct

demonstrated an unfair commercial practice of Volkswagen, which was

characterized by the diffusion of falsified information that damaged the freedom

of consumers in the purchase decision. The sentence has confirmed that owners

of faulty vehicles have to be compensated for the damaged suffered. The unfair

conduct is clearly demonstrated by Volkswagen communication campaigns and

messages. These reasons have been approved by the Venice court, which opened

the adhesion to the class action. The sentence was an important step, since it could

lead to a “domino effect”, which would increase the economic damage of

Volkswagen also from European customers27.

The way of doing of Volkswagen in Europe may is explained by the large loyal

clientele throughout Europe and the lower number of people that has adhered to

the lawsuit carried on against the company. Moreover, EU regulations do not

assure those kinds of compensations. In US, the behavior is dissimilar, not only

for the different regulations but especially for the kind of clientele. Owners are

more attached to American car manufacturers and it is easier to change their

preferences if Volkswagen treat them in unsatisfactory way.

Bosch case is quite different. Even if it has some obligations in product liability,

Volkswagen creates the fault into the system. The eventuality could be, however,

not enough. Bosch’s clients could require higher types of warranties that maybe

increase costs of made contracts. Nevertheless, it is very unlikely that they will

27 Bassi M., Venice court sentence, 2017, 25 May

36

change their supplier, at least, in the short run, because Bosch guarantees a sign

of high quality for them.

37

3.4 Impact on brand image

In all businesses, leaders have to take into consideration not only shareholders

but also the people and the environment. Volkswagen concentrates all its efforts

in order to gain short-term profits and goals; the company does not care about

other issues as the sustainability of the company’s brand, its customers and the

environment.

Sustainable businesses can support shocks from any kind of events that could be

financial crises or natural calamities, moreover, financial sustainability can create

flexibility for the business. This outcome is generated from durable relationships

that the company undertakes with communities, the environment and its

employees. Volkswagen’s behavior was totally against the sustainability concept.

Volkswagen executives should have imagined that these activities could generate

profits but even benefits to their organization in the long-term. At the opposite,

the impact of Dieselgate was an immediate economic loss, as the depreciation of

Volkswagen shares in global financial markets, and a huge amount to pay for the

recall campaign and the following penalties from governments.

Volkswagen planned to sell its defective vehicles labelling them as “clean diesel”

automobiles. The company tried to alleviate environmental concern of customers,

rather than introduce electric-hybrid vehicles that really solve the ecological

issue. The scandal was neither an accident nor an error; it was systematically and

technically programmed deception and fraud. After Dieselgate the loss of

reputation has been a serious concern for the company, also more important than

the huge payments.

It is difficult to evaluate the losses of an immaterial good as reputation because

it is difficult to measure them as a regular economic loss. Reputation is a factor

that create and destroy value as well as other economic forces, but, more than

38

them, incompetence, although grave, is recoverable, while the lack in sincerity is

not. Last reports exhibit that Volkswagen become the world’s largest

manufacturer, at expenses of Toyota, but the real results have not been shown yet

and, as analysts say, this trend is expected to change28.

In the emission scandal, Bosch has to refund Volkswagen’s client too with a sum

equal to about 330 million dollars. Beyond the pure economic loss, analyzing the

Bosch’s role into the events, there is also for them a loss of reputation. As

previously introduced, Bosch is the most important provider of automotive parts

and accessories in the world, equipping the most important car manufacturers.

Bosh’s responsibility in the scandal is clear, even if less remarkable than

Volkswagen, and this can damage their image within its clients.

The extent to which Bosch brand has been damaged is less than Volkswagen. In

another perspective, Bosch did not damage directly the final clients because, as

known, the cheating system, even if provided by Bosh, was probably explicitly

requested by Volkswagen

28 Bibhu Prasan Patra, “The Deliberate Deception: Case Study on Volkswagen Emission

Scandal”, Journal of Management, 2016, March

39

3.5 Similar cases

Dieselgate is only one of a long series of scandals in automotive industry.

Ford Pinto’s scandal exploded in the 1970s. The controversy born when the

magazine Mother Jones reported Ford that it was responsible to mortal fires in

rear-end accidents. Successively, it was discovered that Ford’s internal

documents exhibited that the company knew about this defective component but

they preferred to not solve it, the carmaker calculated that it could be cheaper to

pay potential compensations from accidents. Cause to the death of three teenagers

in Indiana, the company was accused for negligent homicide, even if it was

innocent. After this event, in 1978, Ford ordered a recall campaign to install new

components in order to fix the rear-end accidents issue.

Another event raised in 2009 with Toyota. After the death of a California

Highway Patrol Officer and his family, cause to lose of control of its Lexus,

several accuses started against Toyota. National exposure forced Toyota to begin

a recall campaign; the company explained it as a problem caused by a floor map

entrapment. However, successively, the company admitted that there was a

problem with “sticky pedals”. Technically, the accelerators get fixed at partially

depressed levels and it seems that something hinder the pedals, as the floor map.

In 2014 Toyota was obliged to pay a huge amount, about 1,2 billion dollars, to

avoid criminal examinations and it was the largest penalty ever paid by an

automotive company, before Dieselgate. Toyota disclosed that it deceived US

customers by hiding and reporting misleading statements.

Another scandal was born in the supplier sector and could be compared to

Bosch’s investigation.

40

Takata is a Japanese manufacturer of airbags, the company was accused to

provide a defective component in the installation of its airbags. During accidents,

the airbags exploded with too much force and this mechanism caused metal

scraps flying into the passenger cabin. The faultiness has been considered

responsible of eight deaths and 100 injuries in US. The defective component lead

Takata to a recall campaign, it regarded about 19 million vehicles in US equipped

with them. As New York Times reported, Honda, that was one of the provided

companies of those defective airbags, and Takata recognized the danger behind

the airbags for years, keeping the silence, before starting recalls and disclose it to

the national agencies. In September 2016, the US National Highway Traffic

Safety Administration started new examinations that embraced a wide variety of

airbags made by Takata.

Furthermore, in 2016, regulator explained that auto companies were liable for

Takata’s faulty airbag recalls. About this affair there are other concerns affecting

the National Highway Traffic Safety Administration, Mark Rosekind, the head

of the agency, admitted it is likely that there are in circulation more than 300.000

old Honda branded vehicles, that have installed Takata airbags with a 50%

chance to be defective during a crash.

These scandals were handled as Volkswagen is currently doing, through huge

payments, but there is an important difference. For instance, Toyota overcomes

its losses with a long-standing plan aimed to innovate and at the meantime

increase its market share, while Volkswagen has solved its problems merely

changing the CEO. Without a clear and longsighted business plan, and keeping

the same obsolete corporate culture, the company could meet some difficulties in

order to come back as the first carmaker in the world.

Takata’s scandal is important to compare with Bosch’s role in Dieselgate. Both

suppliers are involved in the product liability but they are not responsible in the

41

faulty of the products and carmakers are considered the unique counterpart that

have to compensate its damaged clients29.

29 Reuters, “Regulator Says Automakers Are Responsible for Takata’s Faulty Airbag

Recalls”, Fortune, 2016, 3 November

42

3.6 The Volkswagen scandal impact on its major competitors

A scandal as Dieselgate has surely an important impact on the entire automotive

industry. It affects car manufacturers all over the world for two reasons. First of

all, this scandal lead to new measures to adopt in terms of new regulations about

emission standards, globally, and this influence car manufacturer policies not

only in the long term but, above all, immediately. The other reason is that,

Dieselgate reconsider the position of Volkswagen into the market. The possible

consequences of the scandal on the company move a series of eventualities for

its competitors, especially in terms of market shares.

The Volkswagen scandal, as reported by many reviewers, could be seen as the

first step that leads to the collapse of the diesel car market. Max Warburton, an

automobile research analyst at Bernstein Research, stated in an interview on that

topic that: the move against Volkswagen is going to act as a catalyst to speed up

the fall in diesel market share in Europe and halt it in the US.

Dieselgate, in fact, could increase the issues related with that particular market.

These vehicles are already known, especially by environmentally concerned

customers, as particularly pollutant and expensive, in terms of insurance

coverage, than petrol cars, and they are going toward a gradual fall. These

considerations are disastrous for European automobile market. As known, EU

has invested a lot, over the last decades, on these kind of vehicles, with incentives

and subsidies to boost companies to build a more eco-friendly diesel engine.

Dieselgate has shown how this activity created a huge economic loss caused by

a large waste of money among Europe. These considerations are significant: in

fact, also Germany, which is the largest export site of automobiles in Europe, has

raised its concerns over the lack of regulation inside the automobile industry and

the need to implement a new regulatory framework in the short period.

43

The new hint boost companies in automotive industry, from car manufacturers to

suppliers, to fast move to new type of engines more sustainable for the

environment.

Another important consequence is the manner in which consumers face after the

scandal, not only in environmental terms but also regarding the trust towards

automobile companies.

Dieselgate implications are having consequences in market share not only on

Volkswagen: other car manufacturers, as well as Peugeot, Renault, Nissan and

BMW have seen their market share decreased by 2 to 4 percent since the scandal

first started. Furthermore, more attention and new regulations concerning the

European automobile industry are likely to become more stringent, and the

immediate consequence could be a loss of profits associated with a loss of

confidence of customers.

The scandal hit, obviously, especially Volkswagen with consequently large

losses and reduction in market share; this result has surely a positive effect for its

competitors, above all Toyota that overtook Volkswagen as larger car

manufacturer. American hybrid and electric car brands, in particular, could and

should take advantages of the situation that this scandal brought, such as the need

for eco-friendly vehicles.

44

CHAPTER 4. The new perspectives

4.1 After the scandal, the new investigations

Dieselgate creates an alert system in environmental agencies all over the world,

new investigations started and all the automotive industry is under examination.

In 2016, FCA was under investigation for fraud by FBI. The investigation started

after that, in December 2015, FCA substantiated the best month of sales in the

US, and it was a record in the automaker’s history, with 217.527 vehicles sold.

According to latest reports, those results were considered untrustworthy and

inaccurate. A Chicago-based dealership group (which sources does not disclose

the name of) marched a lawsuit against FCA earlier in 2016. FCA was indicted

of paying off dealers to fake new vehicle sales. When the press charges emerged,

the FCA group claimed that any such accusations had no basis and therefore no

merit.

According to “Automotive News”, after the initial lawsuit, FCA started adding

extended refusals of responsibility at the end of all monthly sales reports. In

August, FCA agents made the following statement after the US Justice

Department began probing saying that they will “cooperate fully” with the

Securities and Exchange Commission investigation regarding the “reporting of

vehicle unit sales to end customers.” The car-manufacturer also included with

their public statement that they will also cooperate with “inquiries into similar

issues … recently made by the U.S. Department of Justice”.

The examining from the FBI and the SEC initiated in July 11 when they visited

FCA field staff in their homes and offices. Later, the federal staff attorneys visited

the headquarters of FCA US in Auburn Hills, Mich. Eventually there were visits

45

also directed in Orlando, Dallas and California involving both current and former

FCA employees.

Furthermore, at the beginning of 2017 EPA accused FCA of using software that

allowed 100 thousand vehicles, SUV sold from 2014 in US, to exceed emission

standards. However, FCA rejected the accusations calling itself “in good standing

and ready to collaborate”30.

In 2016, another investigation started against General Motors about emissions

from the Chevy Cruze diesels in the US. GM launched the Chevy Cruze diesel

model to challenge Volkswagen’s supposed dominance into the diesel market.

GM then moved the 2.0 liter diesel engine from Europe to the US market and

appealed that the US model was even cleaner here than it was there. Mike

Siergist, GM’s chief engineer behind the US model of the diesel engine,

confirmed this statement; he said to the press that this new engine has better NOx

control.

As Volkswagen case, also GM was accused that they launched an engine emitting

- but hiding - excessive NOx emissions.

According to the Seattle based law firm of Hagens Berman Sobol Shapiro, GM’s

diesel factory used emissions-cheating software just as Volkswagen did,

delivering more than allowed NOx to escape the tailpipe. This lawsuit asked GM

to pay all Cruze Diesel owners back the $2,000 premium they paid for their cars

as well as more for punitive damages.

GM denied these indictments, with a representative saying, “These claims are

baseless and we will vigorously defend ourselves. GM believes the Chevrolet

30 Patel, J., “FCA under investigation for fraud by FBI, SEC, and DOJ”, Autoblog, 2016,

18 July

46

Cruze turbo diesel complies with all US EPA and CARB emissions

regulations”31.

Other examination started against Nissan. In Nissan’s case, things were a little

bit different. While they also were accused of lying about the emissions from the

diesel-powered Qashqai, they were suing South Korea for alleging as such.

The South Korean environment ministry charged Nissan 340 million Won

($290,000) last month and proceeded to order a recall of more than 800 Qashqai

vehicles sold, before punctually blaming the Japanese automaker of using a

similar so-called defeat device to Volkswagen in the Qashqai model.

A Nissan representative gave the following statement to “Automotive News”

that: “We have filed the lawsuit to dispute the ministry’s accusations”.

At the same time, the ministry has also filed a complaint with prosecutors against

Nissan Korea and President Takehiko Kikuchi, with the charge of violating an

environment law.

As reported by a ministry official: “We believe that we have taken appropriate

legal action”32.

Linked to Nissan investigation is the Renault’s case. The French Press wrote that

antifraud French investigators sequestered computers in some Renault offices, in

January 2016. The implicated sectors were engines approval and control; this

investigation is strictly linked to Volkswagen scandal inquiry.

31 Blanco, S., “Lawsuit alleges Chevy Cruze Diesels use VW TDI-like cheat”, Autoblog,

2016, 24 June

32 https://www.endurancewarranty.com/learning-center/shoptalk/news/every-automaker-

diesel-scandal/

47

Renault confirmed the inspections and explained that tests did not prove illegal

mechanisms about emissions, an argument confirmed by French authorities. The

investigation aimed to engine control unit. The suspect concerned the turbo-

diesel engine Energy 1.6 Dci offered in two power levels (130 and 160 CV), that

equipped several models of Renault-Nissan group (Renault Espace, Nissan

Qashqai) but Daimler vehicles too, as Mercedes Class C thanks to the industrial

alliance between these two groups. It is important to highlight that the 1.6 Dci

equipped Bosh Edc17 central units, the same used by Volkswagen engines got

involved in Dieselgate33.

33 Moussanet, M., “Renault sotto inchiesta a Parigi, titolo giù in Borsa”, Il Sole 24 Ore,

2017, 13 January

48

4.2 The fault of the regulatory framework

The Dieselgate scandal itself is the extreme representation of the situation in

Europe, where automakers exploit the lack in the regulatory framework to adopt

illegal practices, which are becoming “best practices” among automotive

companies. The immediate consequence is that the EU ability to enforce emission

standards law is going to fail.

To explain this causal chain of events is important to analyse two policy variables

and their role in EU’s failure to implement real world automotive emissions

target:

1) EU Regulatory Design of command and control (CAC) policies arranged in

the EU automotive industry, classified as general regulatory instruments;

precisely the performance standard regulation of Nitrogen Oxides (NOx) and

Carbon Dioxide (CO2) tailpipe emissions. NOx in the EU is regulated as a

toxic emission under the Euro 1–6 legal frameworks, first introduced in 1993,

and CO2 is regulated under EU regulation (EC) No 443/2009, which was

phased in between 2012–201534. These EU guidelines imply automakers to

meet a certain level of emissions based on a fleet average, indeed several

industry sources have discovered that there is an important gap between

emissions exhibited by automobile companies and actual real-world

performance figures35.

34 Bergek, A., & Berggren, C., “The impact of environmental policy instruments on

innovation: a review of energy and automotive industry studies”, Ecol. Econ. 106, 112–

123, 2014

35 ICCT, “Impact of real world driving on emissions from UK cars and vans”, Committee

on Climate Change, 2015; Transport & Environment, “Closing the chasm between test and

real-world car CO2 emissions”, Transport & Environment, 2015

49

2) Policy interaction between EU CAC policies and EU member state market

based instruments (MBIs), incentivizing, especially, low diesel emissions.

Policy interaction is an important argument to analyze since policies are

usually made in isolation and there are sometimes accidental consequences

when different policies take effect on a market.

During this section will be discussed: a brief overview of CAC regulation and

policy interaction, a background regarding EU preferential treatment of diesel

and the real-world emissions gap and how automakers were able to skirt the EU’s

strict performance standards for reducing emissions in road cars (the fault in the

system).

Since the 1960s, OECD and emerging countries have established the objective to

set the development of technologies in order to decrease air pollution. The two

most important policy instruments that allow them to reach this goal are CAC

environmental regulations and MBIs. CAC policies are guidelines that compel

producers to modify their behavior, although MBIs give financial incentives to

private companies and consumers in exchange for changes in their behavior, for

example tax reductions, exemptions and bonus payments36.

In the automotive industry, researches report that technology-forcing policies are

the drivers to boost emission technologies development and the introduction of

emission control systems. Furthermore, research shows that the lack of regulation

(or presence of lax regulations) obstructs innovation significantly. The result is

36 Santos, G., Behrendt, H., Maconi, L., Shirvani, T., Teytelboym, A., “Externalities and

economic policies in road transport”, 2010

50

that technology-forcing policies approach substantially encourage the

development of eco-friendly vehicles37.

At the beginning, in 1995, the European Commission (EC) worked together with

automakers to implement an autonomous set of regulatory standards to reduce

CO2 emissions. Nevertheless, even if this settlement lead to some decrease,

especially in France, there was, in average, an increase by 20% of pollution level

between 1990 and 2006, globally. Consequently, EC decision was to apply

mandatory standards to improve the negative trend shown in the previous sixteen

years. In 2007, the EC set a proposal to substitute the actual voluntary

arrangement with a mandatory guideline of 130 g CO2/km. The entire

automotive industry replied that the regulatory goals were not feasible, and after

negotiations, all parties decided to spread over time the mandatory guidelines as

follows: 65% of an automaker’s fleet would have reach the target by 2012, 75%

by 2013, 85% by 2014 and 100% by 2015. Moreover, the EC also established a

new target of 95 g/km by 202138.

Indeed, the EU regulatory framework is less rigorous, in terms of respectability,

than in the US and Japan regarding NOx emissions and it is the main reason why

Europe is the lead market for diesel automobiles and diesel technology

development. Moreover, the EU guidelines are more flexible in terms of

37 Schot, J., Hogma, R., Elzen, B., “Strategies for shifting technological systems: the case

of the automobile system”, Futures 26, 1060-1076, 1994

38 Plotkin, S.E., “Examining fuel economy and carbon standards for light vehicles”, CO2

Emiss. Transp. 37, 3843-3853, 2009; Shiau, C.S.N., Michalek, J.J, Hendrickson, C.T., “A

structural analysis of vehicle design responses to Corporate average fuel economy policy”,

Transp. Res. Part Policy Pract. 43, 814-828, 2009

51

companies’ compliance regarding emission standards and the time horizon for

compliance to be met. While EU emissions principles may have a reduced

technology forced effect, they still encourage continuous innovation and reduce

levels of pollution without raising a “dominant design”39.

Before the scandal of 2015, there was already anxiety and debate among car

industry and Western Europe governments, where politicians and other

stakeholders became more interested in diesel technologies and in the

negotiations for a better air quality reducing CO2 emissions. In 2014, Manuel

Valls, the French Prime Minister, admitted that the favoritisms towards diesel

engine from French government was a mistake and the priority is to change

policies about this issue. The proclamation was noteworthy since French

government owns about 20% of Renault, the most important car manufacturer in

France. At the beginning of 2015, in UK, Barry Gardiner, Shadow Environment

Minister of the Labor Party, reported that the previous Labor government’s

decision to fix the country’s car tax on CO2 output was a mistake, since it had

the involuntary effect to distort the market favoring diesel vehicles. Diesel

vehicles emit four times more NOx and 22 times more chemical substance than

petrol automobiles. These results are important because, as reported by the

Greater London Authority and Transport of London, diesel emissions are

considered the main factor of dangerous level of air pollution in London that

caused the death of about 9500 people each year40. Another estimation from the

39 Oltra, V., Saint Jean, M., “Sectoral systems of environmental innovation: an application

of the French automotive industry”, 2009

40 Walton. H., Dajnak, D., Beervers, S., Williams, M., Watkiss, P., Hunt, A., King’s

College London report on morality burden of NO2 and PM2,5 in London, 2015

52

London Assembly underlie that diesel vehicles account for 40% of the city’s air

pollution.

Since early 2015, the discussion regarding diesel emission was mainly between

carmakers and lawmakers, but after accusatory reports by “Transport and

Environment”, a sustainable transport NGO, the trend was going to change.

These reports (joined with data from International Council on Clean

Transportation) exhibited the large gap in the claimed NOx and CO2 emissions

and proposed the World Harmonized Light-duty Vehicle Procedure (WLTP) and

the Real Driving Emission (RDE) testing procedures to solve the issue. The

reports showed how the gap between test results and real world performance in

CO2 emissions increased from 8% in 2001 to 40% in 2014 and was expected to

rise to 50% by 2020 if it should be remained uncontrolled. (Transport and

Environment, 2015b) It should be also considered that independent publications

and car magazines have consistently flagged discrepancies in advertised fuel

economy estimates by automakers41.

After Dieselgate the French government started debates on the reduction or the

complete elimination of diesel subsidies which made it approximately US 90

cents per gallon cheaper than gasoline. Segolene Royal, the French Environment

Minister, reported about this argument, that there is an inconsistency between the

advantages guaranteed by diesel and its downsides in terms of pollution. The

intervention of the government would increase taxes on diesel while decreasing

them on gasoline in order to offset the gap. The under taxation of diesel engine

made it the most common technology in automotive market across Western

Europe. The consequence of the policy that could be adopted by French

41 Consumer Reports, “The miles per gallon gap”, Consumer Report Magazine, 2013

53

government, according to the French automaker association (CCFA), would be

catastrophic, since approximately 68% of all vehicles in France are diesels42.

In the UK, about this argument, Lord Drayson, former Labor science minister in

the Brown government from 2008 to 2010, said: “We did get it wrong. We now

have a much better understanding than we did just a few years ago of what are

the health effects of the products of diesel cars and they are literally killing people

so it's clear that in retrospect that was the wrong policy”43.

Generally, the new wind among European governments is a huge problem for the

European bigger car manufacturers, as the two state-backed companies (Renault

and Peugeot) and the German “big three” (BMW, Daimler AG and Volkswagen).

In fact, as referred by an industry report, the diesel mix, diesel cars in proportion

of total sales in Europe, in several EU countries ranges between 70-80% among

these automakers, rising to 90% for Volvo44.

The regulatory framework shows some faults that create the inefficient system

that Dieselgate expressed to the entire world. As discussed previously in this

section, lax regulations and lack of policy interaction lead to this situation. There

are different consequences of a lax regulation, obviously in terms of human and

environmental health but, especially, at regulatory level, in terms of exploitation,

due to a kind of behavior adopted by agents inside the market, compromising the

42 Rosemain, M., “France moves to end diesel’s tax break amid emissions scandal”,

Bloomberg.com, 2015

43 Kollewe, J., “UK government wrong to subsidize diesel, says former minister”. The

Guardian, 2015

44 Sharman, A., “Carmakers braced for European crackdown on diesel vehicles”, Financial

Times, 2015,

54

entire framework. About this argument, it is reported the message of an EU

regulator in the Dieselgate context:

“To go back to the mantra about deregulation and light-touch regulation and so

on. What you see with the Volkswagen case is how damaging it is not to have

effective regulation. I mean, the cost of this single incident to Volkswagen is

going to exceed I would imagine any estimate of what proper regulation would

have cost the industry”45.

Dieselgate shows clearly how automakers have actively exploit the fault in the

testing procedures, or the flexibilities, to their sole benefit.

The second argument to analyze is policy interaction. It arose since stakeholders

argued that diesel was something “denigrated”. Generally, many claimants from

automotive industry specified that the boost to sell and produce diesel vehicles

was encouraged by the policies put in place by governments, and now diesel

market is suffering a remarkable repercussion.

The main source of policy interaction argument is the correlation between EU

emissions regulations and technology-specific economic instruments, executed

by EU member states that specifically favor the low carbon benefits of diesel

technology. The problem is described by an EU regulator, he said: “The reason

many people buy diesel cars is because they are cheaper to run, one of the

reasons they are cheaper to run is because diesel is undertaxed, that is a decision

by member states, the EU has tried to reform fuel taxation and the member states

have rejected that, despite the commission’s proposals saying ‘this is not

right”46.

45 Jean-Paul Skeete, Examining the role of policy design and policy interaction in EU

automotive emissions performance gaps 46 Jean-Paul Skeete, Examining the role of policy design and policy interaction in EU

automotive emissions performance gaps

55

Political interests are the main drivers of the lack in policy interaction among EU

and actually the most important reason of national economic incentives. There

are several opinions about the benefits and drawbacks of diesel engine. EU

regulators believe that diesel should be more expensive than petrol since it has a

higher energy density. Nevertheless, critics replied that in some member states,

diesel is taxed at a lower rate than petrol and there is no evident justification for

that action. They argued that, in the past, diesel was under-taxed, since diesel was

mainly used in heavy goods vehicles; that choice was correct because taxes

should not be applied to an intermediate product that is economically inefficient.

However, they claimed that, nowadays diesel is more used in cars as commercial

vehicles, so the previous argument has lost its validity.

The preferential conduct towards diesel vehicles, thanks to incentives, such as

under taxation, produced a market pull effect and increased their popularity

throughout Western Europe. The outcome was that, at EU legal perspective, car-

manufacturers produced vehicles expanding real-world emissions gaps. At the

national level, there was a huge increase in demand for these kind of vehicles,

which created a lock-in effect to a suboptimal technology47.

In conclusion, the most important source of real world emissions gaps was an

organizational failure in the policy to implement stringent adherence by OEMs

(Original Equipment Manufacturer). Several factors paid the way to this

legislative collapse, particularly the exploitation of flexibilities in the regulatory

framework by car manufacturers. Another factor was the negative effect on air

quality caused by weak policy interaction about diesel under-taxation, which

produced a national market pull effect and a lack in regulatory boost for lower

47 Dolfsma, W., -Leydesdorff, L., “Lock-in and break-out from technological trajectories:

modelling and policy implications”, Techolog. Forecast Soc. Change 76, 932-941, 2009

56

CO2 emissions at the EU level. The consequence was a lock-in effect with the

diffusion of over-polluting diesel vehicles in European market48.

Diesel engines, which in the past appeared promising, is now leaving the place

to more powerful technologies which were not been considered in the past.

48 Witt, U., “Lock-in vs critical masses- industrial change under network externalities”, Int.

J. Ind. Organ. 15, 753-773, 1997

57

4.3 The future eventualities of the regulation

After Dieselgate resulted that Germany, Italy, Austria, Spain and many Eastern

member states refused to support strict limitations on diesel vehicles emissions.

Consequently, an agreement was set between member states and EC: new diesel

vehicles will be allowed to overcome the NOx pollution limit by no more than

double, from 2019 that amount must be further decreased to no more than 50%.

Meanwhile, US EPA supervisors, in cooperation with the EC and MEPs

(members of European Parliament) ahead of the European Parliament’s vote, are

discussing about the meaningless to establish new standards about test cycles if

they do not have the authority, the resources and the determination to enforce.

For this reason, the EC suggested to follow the US model; in fact, as EPA in US,

the EC proposed a provisional agreement that would provide them new powers

to supervise national authorities in the approbation process of new vehicles. The

new proposal establishes that transgressors will be penalized up to 30.000 euro

per vehicle founded in the EU. Nevertheless, differently from EPA in US, this

proposal derived within reports that the Commission felt limited in its ability to

enforce, as member state government are primarily responsible for the

implementation of the regulation49.

However, the EPA's failure to uncover Volkswagen's illegal behavior should also

be a warning account to the EC, which even enhanced organizational autonomy

does not safeguard against chronic regulatory failure.

The Volkswagen scandal places the European regulatory framework under deep

inspection. The future of the regulation could be based on several contributions

49 Stupp, C., “US Dieselgate watchdog met Commission and MEPs head of key emissions

vote”, EurActiv.com, 2016

58

from critics and academics that after the scandal published a number of

researches, which exhibited how the real world performance gaps were born from

the manipulation of flexibilities into the legislation by companies. The result is a

damage in air quality that surely had contributed to the worsening of public health

among European Union50.

Nowadays, European regulatory framework is at the beginning and it is predicted

a long debate between European Council and Parliament where there is the

adverse position of powerful national parties. The main concern is that these

countries are unfavorable to the new discipline that could increase costs for

automakers, which operate directly in their territories. These costs could been

reflected on the labor and consequently on the economy of these countries.

However, these changes in the regulatory framework will be adopted anyway:

the measures, that will be implemented since now to the 2021 and will make test

results closer to emission revealed on the road, will force to an increase in

production costs.

Emission standards were fixed in 2007, but so far they are been respected only in

unrealistic homologation tests. Nowadays, tests will be more onerous for the

companies; it is estimated that new devices for the NOx catalysts could lead to

the powertrain (describes the main components that generate power and deliver

it to the road surface, water, or air. This includes the engine, transmission, drive

shafts, differentials) cost equal to the 40% of the entire vehicle.

European Parliament has approved the recommendations voted in the first Emis

(Emission Measurements in the Automotive Sector) commission, which has

examined from autumn (but with insufficient influence) the Dieselgate.

Recommendations mainly require:

50 Walton. H., Dajnak, D., Beervers, S., Williams, M., Watkiss, P., Hunt, A., King’s

College London report on morality burden of NO2 and PM2,5 in London, 2015

59

1) A quick adoption of the regulations about Real driving emissions (Rde), with

the implementation of unpredictable challenges in homologation tests in order

to detect illegal devices.

2) That Commission proposes a EU collective complaint system and

compensations for car owners

The European Parliament approved the new homologation proposals anti-

Dieselgate, they expect:

1) Intensification of on road supervision and that the national authorities will

be obliged to verify the previous year almost the 20% of inserted vehicles

into the market.

2) Commission would have more power to introduce greater supervision

when national authorities do not respect homologation commitments and,

in some cases, it can implement itself tests and inspections to the vehicles.

3) Car manufacturers that cheat on test results would be subjected to

sanctions until 30000 euro each vehicle and the consequent earnings will

be used for the market monitoring, consumers damaged or for the

environment safeguard51.

The growing repercussion towards diesel vehicles throughout Europe could be

seen as the intervention of policymakers to overturn the enduring privileged

treatment that diesel cars has received from member states.

The first solution to adopt in order to change the inefficiencies of the EU legal

framework should be immediately solving all flexibilities during future test

cycles. To apply this legal procedure, the only obstacle is the member states

hesitancy; in fact, as known, some of them have special interests, as

shareholdings in their domestic auto companies, which could create difficulties

51 Caprino, M., “Effetto dieselgate, prezzi in aumento dal 2020. Braccio di ferro in

Europa”, Il Sole 24 Ore, 2017, 5 April

60

in approving such revisions in the regulation. It is important to take into

consideration that, potentially, if a member state retroactively decide to remove

preferences of a particular technology like diesel, the action is likely to create a

damage to all those consumers that bought, thanks to government’s economic

incentives, diesel vehicles. The member states supremacy could be solved

granting an extra decision power to the European Commission. The authority to

intervene at the national level would facilitate these problems in approving new

guidelines, but this is another decision that need the EU member states approval.

From an industry perspective, future EU emissions goals will be modulated down

to a point where achieving targets with an internal combustion engine will

become virtually impossible, which is the whole point of the regulation.

Nevertheless, innovation is not free and thus the “costs” of these regulations are

of perpetual concern to OEMs. As the EC continues to conduct detailed cost

studies, research has shown that between 1995 and 2010, regulations have not

increased the per unit cost of new cars and that on average, their quality-adjusted

price has remained unchanged52.

About present-day technology, EU regulators’ cost curves foresee that another

50-60% efficiency can be potentially extracted from the internal combustion

engine, compared to 2013 technology (European Commission, 2008).

In US the situation is quite different compared to EU.

EPA and the National Highway Traffic Safety Administration (NHTSA)

developed together, in the immediate future: fuel economy standards for light-

duty vehicles (in particular trucks and passenger cars) and the national program

for greenhouse gas emissions (GHG).

52 Wells, P., Varma. A., Newman, D., Kay, D., Gibson, G., Beevor, J., Skinner, I.,

“Governmental regulation impact on producers and consumers: a longitudinal analysis of

the European automotive market”, Transp. Res. Part Policy Pract. 47, 28-41, 2013

61

The standards were established in two phases:

Phase 1: model years 2012-2016

Phase 2: model years 2017-2025.

Both final standards are developed to:

Cut 6 billion metric tons of GHG over the lifetimes of the vehicles sold

in model years 2012-2025

Result in an average industry fleet wide level of 163 grams/mile of CO2

in model year 2025, which is equivalent to 54.5 miles per gallon (if

achieved exclusively through fuel economy improvements)

Reduce US’ dependence on oil by more than 2 million barrels per day in

2025

Save families more than 1.7 trillion dollars in fuel costs 53

EPA determined that these standards could be discussed in a Midterm Evaluation

and it concerns the longer-term standards for model years 2022-2025. The

evaluation has to be exposed to the cooperation of the California Air Resources

Board and NHTSA.

On January 12, 2017, EPA’s administrator, Gina McCarthy, signed her

determination to conserve the present GHG emissions standards for model year

2022-2025 vehicles. Her final determination established that automobile

53 https://www.epa.gov/regulations-emissions-vehicles-and-engines/regulations-

greenhouse-gas-emissions-passenger-cars-and

62

companies are at a good point to meet the guidelines at lower costs than

previously estimated.

In fact, the results of Administrator McCarthy’s January 2017 Final

Determination are:

The standards will save consumers money, significantly decrease GHG

emissions and fuel consumption providing benefits to the health and

welfare of Americans

Car-manufacturers outperformed the standards for the first model years

(2012-2016) and they are implementing fuel efficient technologies at

exceptional rates, meanwhile vehicle sales increased for seven

consecutive years

Car-manufacturers have a wide scope of development of efficient

technologies to meet model years 2017-2025 standards, at slightly lower

per-vehicle costs than previously predicted. The standards are feasible

with very low diffusion of powerful electric, hybrid vehicles.

McCarthy’s Final Determination was based on an extensive eight years job where

several stakeholder meetings, researches and published reports gave input to

build the current guidelines. The Final Determination follows the November

2016 release of EPA’s Proposed Determination and the July 2016 release of a

Draft Technical Assessment Report (TAR), distributed together with EPA,

CARB and NHTSA. EPA provided opportunities for public observation to both

the TAR and the Proposed Determination.

On March 15, 2017, it was considered to review the Final Determination, issued

on January 12, 2017, to introduce new proposals to the GHG and regarding the

fuel economy standards for light-duty vehicles for model years 2022-2025, which

were not expected in the previous determination. EPA has just announced, with

63

Administrator Scott Pruitt (nominated after Trump escalation) and Department

of Transportation Secretary Elaine Chao, it will reconsider that determination in

coordination with NHTSA.

The intermediate process was already planned as part of the 2012 phase for model

years 2017-2025, demanding EPA to establish by April 1, 2018, the compliance

of the standards for model years 2022-2025. According to that program, it is

expected that EPA will determine, even more, a new Final Determination

regarding the compliance of the standards within April 1, 201854.

If the current situation in Europe is not clear and surely is not in an advanced

projection, in US it is precarious. In fact, a wide share of EPA’s programs could

be under the knife to meet President Donald Trump’s budget proposals

requirements, as several sources report, and as the designation of Scott Pruitt

could implicate. Trump’s campaign in favour of petrol industries and military

enforcement will cause, probably, for EPA a budget cut of 25% costing about

3000 jobs loss. This program could hidden EPA’s most important and best-

known plans, as initiative to improve water and air quality, as well as many

regulations aimed to reduce nation’s greenhouse emissions (Clean Air Act). The

Clean Power Plan, which could return into cuts program, was a proposal by

former President Barack Obama aimed to diminish carbon emissions from each

state. Furthermore, Trump’s plan entails other fourteen different EPA’s

partnership programs to reduce greenhouse gas emissions.

The new warning-sign arise in US could hinder the important changes that

automotive industry needs for improving next generations well-being. US is very

influential into European dynamics and this new ideology, that is spreading in

54 https://www.epa.gov/regulations-emissions-vehicles-and-engines/midterm-evaluation-light-

duty-vehicle-greenhouse-gas-ghg

64

US, could slow down or even stop the possible changes into the regulatory

framework even in Europe.

65

4.4 Future prospects and advices for Volkswagen

European governments granted economic incentives to diesel engine over

gasoline since they allow a higher fuel performance for a lower carbon emission.

However, Dieselgate is the beginning of a new trend in European automotive

industry. The scandal has lead governments to move towards ecological vehicles;

for example, in Italy, government gave the concession of free parking for electric

and hybrid vehicles, and even car-sharing companies are thinking about

introducing the launch of eco-friendly automobiles in their fleet.

As seen previously, an increase in production costs due to new regulations will

cause a reduction in the supply of diesel vehicles (especially at the bottom of the

market). Considering the car sharing and public service progress (in more

organized cities), the automobile market should settle to low levels compared to

the present.

The new wind is demonstrated by declarations of political figures throughout

Europe. In Paris, for instance, the mayor affirmed that within five years diesel

vehicles will be banned to reach the programmed green plan of the city.

Moreover, in other European countries it has been formalizing the cancellation

of incentives for diesel vehicles. These programs lead automobile companies to

rethink about the launch of new diesel vehicles, since without public subsidies

the production of these kind of engines become more costly compared to others.

The pronouncements emerged from the European Parliament Committee

exhibited the agreement to reformulate and improve guidelines on automobile’s

pollution limit and fines55. The statement is important especially concerning the

behavior of consumers, they maybe are motivated to buy eco-friendly vehicles

55 George, L., & Bousso, R., “RPT-Volkswagen emissions scandal dims outlook for

diesel”, Reuters, 2015, September 23

66

and this is an important aspect to consider in future projection for automobile

companies. German government is very interested in this topic, and this is the

reason why it planned to force automotive industry to boost sales and

development of electric cars up to a million by 2020. Furthermore, subsidies have

to be relocated to more eco-friendly electric models. Volkswagen decided, during

its plan to recover its brand image, to concentrate its production efforts toward

the development of new technologies. The company opted to renovate its over-

used diesel control system for newest models, and in the meantime, focusing on

the production of electric and hybrid vehicles. As reported by the New York

Times, Volkswagen should adopt its new technology for 2019 and 2020 models

of the Paethon limousine56. It is important to observe how the new renovation

plan of Volkswagen it’s mainly concentrated on revamping its diesel control

system, rather than totally focus on hybrid as its major competitor, Toyota, is

doing.

Dieselgate was an alert for all automobile companies all over the world. They

learned the importance of clean energy technology and the relevance to focus on

long term R&D strategies. Decisions of the bigger auto companies to plan the

launch of new eco-friendly vehicles, for instance Toyota programed to produce

several models of hybrid and ecological vehicles by 2050, lead to an increase in

consumers choice regarding more alternative energy vehicles to buy. Some

analysts expected that automakers would consolidate, through agreements or

partnerships, to share costs and responsibilities to develop alternative-energy

vehicles. Difficulties could emerge if circumstances as low oil prices, expensive

56 Kieler, A., “VW moving forward with new emissions system, electric power for future

models”, October 2014, Consumeristic, 2015

67

costs to purchase, and inconvenience to fuel, would overshadow the long-term

benefits of purchasing alternative-energy cars at a greater cost57.

Furthermore, the development of gasoline engines that become fuel efficient and

more powerful, with lower carbon emissions, could create a further obstacle to

the spread and the growth of alternative-energy automobiles58.

Volkswagen scandal lead the company to face the need to develop a strength

model to launch into the market, even to use it as a symbolic image of its new

cycle, recovering the brand image. Nowadays, maybe there is a slow process of

recovering since the company is affected by economic losses all over the world,

caused by recalls, fines, and a further concern due to decreased sales in the short-

term and a diminished brand image in the long-term. In fact, while in the short

term the company had to pay huge penalties, especially in US, and large amount

for the recall campaign, in the long term the company may need many years to

recover its corporate image and loss of costumer’s trust. Even if USA and China

accounted for small shares of diesel vehicle unit sales, they are the largest auto

markets worldwide and it is into the interest of the company to recover its

sustainability even in these markets, particularly for the future prospects of the

automaker59.

Volkswagen scandal and the consequent loss of trust of company’s customers

could threaten the long-term profitability of the automaker. Currently, it is

57 Phelan, M., “Diesel scandal opens door for other technologies”, Detroit Free Press, 2015,

October 24

58 George, L., & Bousso, R., “RPT-Volkswagen emissions scandal dims outlook for

diesel”, Reuters, 2015, September 23

59 Ewing, J., “Volkswagen says 11 million cars worldwide are affected in diesel deception”,

New York Times, 2015, September 22

68

difficult to estimate the potential total costs of the scandal but it would be

important to watch out what the company should do in the next couple of years.

Dieselgate creates a need to change for Volkswagen and in order to recover its

credibility there are some advices for the company, such as: develop Leadership

with Emotional Intelligence Flexibility, inject Outside Perspectives and monitors

and be Aware of a Competency Trap.

1) Develop Leadership with Emotional Intelligence Flexibility.

Strong emotional intelligence allows leaders to spread trust and effective

communication within the company. Leaders can build a network with other

employees using honesty, empathy, tolerance and cooperation. Both Piëch

and Winterkorn leadership style was based on the fear. Their engineering

backgrounds lead them to concentrate mainly on details and

micromanagement and this is a reason why they were not adroit to be tolerant

and flexible. That leadership style could be more efficient in the mass-

manufacturing era, where the main concern was the cost efficiency through

standardization and top-down distribution of the power. The automotive

companies are a kind of environment that needs different approach and no

single company can identify and manage all the information. Into this

business, the key to success is cooperation and interaction among employees

who accept other expert’s opinions. To reach effective management, leaders

do not have to stop at an individual perspective, but they have to develop a

corporate culture where everyone can share its ideas without fear.

2) Inject Outside Perspectives and Monitors.

Corporate governance can be positively influenced by an external personality.

Two owner families, the Porsche and Piëch families, dominate Volkswagen

management. Moreover, the government of Lower Saxony and unions

compose the supervisory board of the company, sharing similar ideals and

69

objectives, as full employment and production. The result is an obsolete

governance based on the same ideals since 60 years. It is important,

particularly after the scandal, to inject fresh ideas from the outside to start the

process of renovation that the company needs. For instance, CSR positively

affects, on average, a company’s financial performance. (Barnett & Salomon;

Margolis & Walsh, 2003) It would be the best choice to nominate an external

element as company’s CSR chief, since he could operate without internal

pressures, being less dependent on internal managers. Adopting that solution

would be beneficial for Volkswagen image, in fact, an influential external

CSR chief could monitor and influence future manager’s decisions and

actions and it would surely improve company image.

3) Monitor and be aware of a Competency Trap.

It is human nature that past-experience is very influent for consequent

decision-making. Principally, if the past decision was successful in the past,

it is likely that the leader adopt the same approach even in the present. In

Volkswagen case, the successful decision, especially in terms of vehicles

sold, is the diesel engine technology. Executives need to be, after the scandal,

very cautious about their decision, thinking about all possible consequences

and risks that the decision imply. In a fast-changing world, where nothing is

safe, decision-making is even more difficult and sometimes leader rely on

past-experience. Volkswagen managers should be aware of their decisions

and monitor them, exploring new technologies and exploiting current

strengths, which make Volkswagen the most important carmaker in the world.

70

4.5 The new opportunities in the Auto industry

The need to change into the regulatory framework boost the entire automotive

industry to immediately realize or change their strategy.

The most important car manufacturers in the world have to rethink their idea of

business; in fact, while we can observe in all the famous motor-shows all over

the world, every year, the presentation of new prototypes designed for a new

world in pursuit of clean air, no-one have concretely showed a model ready to be

sold. They present these models only to increase the appeal around their

customers. The only one car manufacturer, with a big market share, that have

invested a lot in order to change immediately its strategies, toward a “clean” tech

driven model, is Toyota.

The big automakers have other risks to face-off. New competitor as Tesla Motors

and future players as Apple could reduce their market shares in the future.

New regulations, but especially changing customer needs and expectations, are

driving the growth of electric vehicles into the market, but much of this

excitement can be tracked back to Tesla Motors. Tesla founder and CEO Elon

Musk sprang the company with the mission: to accelerate the advent of

sustainable transport by bringing compelling mass market electric cars to market

as soon as possible. Tesla did not invent the electric car, but, thanks to its business

model, has broght persuasive electric vehicles to the market, differently from

other manufacturers that stopped their prototypes to motor shows.

In April, Tesla registered a symbolic overtaking in terms of market capitalization

over Ford. This is an epochal turning point, the future is of electric vehicles, iper-

connect, hi tech and self-driving, not of the gasoline engine. This new perspective

would not surprise if Tesla could early overtake another giant as General Motors,

far one billion of dollars only in market capitalization. Furthermore, if sales in

71

auto market stopped in March, Tesla exhibited an increase equal to 69% in the

first trimester of the year with 25000 vehicles sold.

The hypothesis is that in the following years will not be the traditional giants to

register growth exploits and larger income. Tesla thanks to its innovative ability

can reach these results. Chevrolet Bolt (GM vehicle) was the reply to Musk

electric car but it sold about 3 thousand vehicles recently, it was unable to

compete and it is an example of how these big rivals be late in this new market

prospect60.

Those needs to shift toward electric vehicles is also driven by the importance to

meet the Paris Agreement’s long-term goal of keeping the increase in global

average temperature below 2°C. As seen in previous sections, the shift towards

implementing them appears to be slow going; maybe, only with subsidies to buy

electric cars this change could be real.

60 Valsania, M., “Il mercato scommette su Tesla: è la nuova Ford, in Borsa e in strada”, Il

Sole 24 Ore, 2017, 4 April

72

CONCLUSIONS

Dieselgate drastically changed the destiny of diesel engine, however, there are

also other factors that are changing the automotive industry: engineers are

designing better and innovative solutions and consequently engines are going to

evolve.

The scandal exhibited all the vile behind the automotive industry and the faults

in the regulatory framework. Different solutions have been presented for building

a new environment, where both companies and institutions would cooperate to

restore the image of an industry which has damaged our world.

Diesel vehicles are expected to become more expensive because of the new and

stringent regulations. The risk is that, in order to comply with the new guidelines,

automotive companies are compelled to add components to the engines,

increasing costs, complexity and technical difficulties. The best solution is to

implement a completely different engine that interact with electric, guaranteeing

the benefits of diesel combined with electric advantages, as well as to the

accessibility to costumers.

The future of automotive market is hybrid. Nowadays, all majors car

manufacturers are implementing hybrid models, and governments have an

important role in the spread of these vehicles. The bigger obstacle is the lack of

charging stations available, and this is an important issue, since installing enough

columns around entire cities represents a huge financial investment. The solution

is to create a sort of incentive or subsidies, which governments will provide to

auto companies as they did with diesel engines.

Last news exhibited how this important shift toward “green” energy is threatened

by US President Donald Trump demonstration during ultimate G7 in Taormina,

Italy, where he declared that USA would reject the Paris Agreement on

73

greenhouse emissions. The pronouncement could affect also the automotive

industry since USA is the largest market, and it demonstrates as sometimes

financial interests make people blind, and negative past-experiences, as

Dieselgate, are forgotten, laying the foundation for a future, new scandal.

74

Appendix

Appendix 1. Volkswagen ’ s Nitrogen Oxides Emissions during On-Road Testing

Gates, C., Keller, J., Russell, K., & Watkins, D., “How Volkswagen got away with diesel

deception”, New York Times, 2015, October 2

75

Appendix 2. Number of Volkswagen Diesel Models Affected by the Defeat System by

Country

McHugh, J., “Volkswagen diesel scandal update 2015: Affected countries are largely in

North America, Europe, but Asia not immune”, International Business Times, 2015,

October 12

76

Appendix 3 Diesel Volkswagens Registered in the United States (January 2009 to June 2015)

Gates, C., Keller,

J., Russell, K., & Watkins, D., “How Volkswagen got away with diesel deception”, New

York Times, 2015, October 2

77

Appendix 4 Worldwide Annual Car Sales before the VW Scandal

Gates, C., Keller, J., Russell, K., & Watkins, D., “How Volkswagen got away with diesel

deception”, New York Times, 2015, October 2

78

Appendix 5 Regulation Map (as of September 30, 2015)

Bloomberg

79

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ABSTRACT

Dieselgate scandal is a critical topic to analyze as it gave the way to a series of

considerations about the automotive industry.

The scandal began in May 2014, when investigations started thanks to the job of

the California Air Resources Board (CARB). Volkswagen diesel models were

exposed to an on road test and researchers at West Virginia University measured

an excessive level of NOx emissions, about forty times higher than the

established US threshold. The results of the investigation in US was that

Volkswagen diesel models were forbidden to be sold by a directive of the

Environmental Protection Agency (EPA) assisted by the CARB. Volkswagen

diesel models were equipped with a deceptive software, which allowed to reduce,

during emissions test, the level of NOx released; this passed in a “clear mode”

when it identified the car was being tested for emissions. The investigation lead

Volkswagen to acknowledge that 5 million branded model were equipped with

the illegal software while the remaining 6 million cars were subsidiary branded.

The 11 million vehicles incriminated refer to a number of faulty cars collected

worldwide. In US, the EPA revealed that 500.000 Volkswagen diesel models

were equipped with the illegal software, a small percentage compared to the rest

of the world, and the scandal broke there, not in Europe (the biggest market for

Volkswagen).

The following analysis proceeds focusing on the regulatory framework, both in

US and Europe.

In US the EPA had an essential role in the scandal. The agency found that several

Volkswagen models were equipped with a defective device that cheated on

emissions level. In November 2015, the carmaker admitted that an illegal

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software affected almost 800.000 of its vehicles worldwide, but EPA

demonstrated that these numbers were lower than reality; in fact, only in US they

found irregularities in 482.000 vehicles. These results overcame the standards

established by the Clean Air Act. EPA’s investigation fostered other countries to

look at this scandal; all around the world several agencies, politicians and

regulators were examining the validity of Volkswagen’s emissions testing. The

consequence for the company after the emissions scandal was that it had to recall

8.5 million cars in Europe, including 2.4 million in Germany, 1.2 million in the

UK, and 500,000 in the US. Furthermore, the company faced a fall in its market

share of a third after the scandal began.

EU limits on emission standards are the most inflexible of the world. This rigidity

is completely in conflict with the uncertainty of the methods with which

emissions are measured. The EU regulatory framework entails different

directives listed from Euro 1, the oldest, to Euro 6 (the newest) and, recently,

Euro 6 plus. Today, consumption and emission of new cars are homologated with

Nedc (new European driving cycle), a test procedure on a kind of “tapis rulant”

where there are three cycles: urban, extra-urban and mixed, the most relevant of

the procedure. The examiners are private companies designated by EU that

implement this practice to analyze the consumption and emissions. Indeed, the

cycle allows consuming less fuel than in reality and the result is uncertainty in

the real emissions data.

Volkswagen scandal is the consequence of a lax regulatory framework, but also

of an anarchical governance embedded in austere leadership style, insular

governance culture and nepotism. These three factors surely lead to the scandal

born, since they develop fear among employees and consequently lack of

communication across the organization hierarchy.

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Dieselgate had an impact on multiple dimensions: it lead to economic, political

and social consequences. The scandal produced a huge economic damage for

Volkswagen; the consistency of economic consequences of this scandal is

reported by the fact that after 15 years the car manufacturer announced a quarterly

operating loss of about 3.9 billion dollars in the period from July to September

2015. Economic losses were tied with: penalties, costs of the recall campaign and

the negative impact on brand image.

The scandal had an impact also on the political side. Volkswagen is a

multinational company and it is a source of income for many countries, which

have special interests. Dieselgate could lead to a different approach between the

company and states because of the new conditions and regulations raised after

the scandal.

Dieselgate lead to important social costs. After the scandal broke, it is scheduled

a 30.000 employees reduction all over the world and the majority of these cuts

are planned in Wolfsburg. Another social consequence, and maybe the most

important, is the implicit cost of the health damages.

The following analysis also considers Volkswagen management responsibility in

the scandal.

Dieselgate can be considered as a total failure in terms of Corporate Social

Responsibility (CSR). Volkswagen applied an illegal strategy to gain an

advantage over its competitors that guaranteed it to maintain its leadership into

the market. The highest levels of the management chain were surely aware of that

behavior and its real consequences - the company was effectively injuring the

planet - were far away from the company’s CSR mission: “to sell

environmentally friendly vehicles”. The company needs to reformulate its CSR

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practices, reinforcing the power of that department to immediate operate in case

of any unethical action: these are the bases to prevent any future fraud.

The responsibility issue concerns also Bosch, the supplier of the illegal software.

Volkswagen is not the only company that could be considered responsible for

illegal behavior in the scandal. Bosch is responsible, in fact, for many of the

components directly involved in the Volkswagen scandal, including the emission

control software (the effective component that made the scandal born). Bosch has

been under investigation in Europe but no Bosch employee has yet been indicted

with wrongdoing. Furthermore, Bosch has recognized that it informed

Volkswagen, in a letter in 2007, that the car manufacturer’s proposed use of the

software provided by Bosch could be illegal and that the company was not

responsible for how its components are incorporated into vehicles by clients.

After the scandal, a lawsuit was undertook against Bosch, which on February 1,

2017, agreed to pay 327,5 million dollars to consumers in US as compensation

for its role in conceiving the illegal software. However, Bosch affirmed that it

did not acknowledge the realities as assumed by the plaintiffs, nor admitted any

kind of responsibility. It seems that the company had decided to settle the issue

in order to clean their role into the scandal and maintain its image toward its

clients.

Dieselgate impact on Volkswagen’s customers is very important. Several

lawsuits were carried out against Volkswagen in US as in Europe and the

economic losses are likely to increase for the company. However, the most

important consequence is the impact on brand image. Volkswagen concentrates

all its efforts in order to gain short-term profits and goals; the company does not

care about other issues as the sustainability of the company’s brand, its customers

and the environment.

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Volkswagen planned to sell its defective vehicles labelling them as “clean diesel”

automobiles. The company tried to alleviate environmental concern of customers,

rather than introduce electric-hybrid vehicles that really solve the ecological

issue. The scandal was neither an accident nor an error; it was systematically and

technically programmed deception and fraud. After Dieselgate the loss of

reputation has been a serious concern for the company, also more important than

the huge payments.

It is difficult to evaluate the losses of an immaterial good as reputation because

it is difficult to measure them as a regular economic loss. Reputation is a factor

that create and destroy value as well as other economic forces, but, more than

them, incompetence, although grave, is recoverable, while the lack in sincerity is

not. Last reports exhibit that Volkswagen become the world’s largest

manufacturer, at expenses of Toyota, but the real results have not been shown yet

and, as analysts say, this trend is expected to change

Dieselgate is only one of a long series of scandals in automotive industry. Similar

cases are: Ford Pinto’s scandal (where it was responsible to mortal fires in rear-

end accidents), Toyota case (where there was a problem tied with the “sticky

pedals”) and Honda-Takata airbags scandal. These scandals were handled as

Volkswagen is currently doing, through huge payments, but there is an important

difference. For instance, Toyota overcomes its losses with a long-standing plan

aimed to innovate and at the meantime increase its market share, while

Volkswagen has solved its problems merely changing the CEO. Without a clear

and longsighted business plan, and keeping the same obsolete corporate culture,

the company could meet some difficulties in order to come back as the first

carmaker in the world.

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Dieselgate had an impact also on Volkswagen’s competitors. It affected car

manufacturers all over the world for two reasons. First of all, this scandal lead to

new measures to adopt in terms of new regulations about emission standards,

globally, and this influenced car manufacturer policies not only in the long term

but, above all, immediately. The other reason is that, Dieselgate reconsiders the

position of Volkswagen into the market. The possible consequences of the

scandal on the company move a series of eventualities for its competitors,

especially in terms of market shares.

Dieselgate implications are having consequences in market share not only on

Volkswagen: other car manufacturers, as well as Peugeot, Renault, Nissan and

BMW have seen their market share decreased by 2 to 4 percent since the scandal

first started. Furthermore, more attention and new regulations concerning the

European automobile industry are likely to become more stringent, and the

immediate consequence could be a loss of profits associated with a loss of

confidence of customers.

American hybrid and electric car brands, in particular, could and should take

advantages of the situation that this scandal brought, such as the need for eco-

friendly vehicles.

The Volkswagen scandal lead to new perspectives in the automotive industry and

the emission standards regulation. Furthermore, Dieselgate creates an alert

system in environmental agencies all over the world, new investigations started

and all the automotive industry is under examination.

In 2016, FCA was under investigation for fraud by FBI. The investigation started

after that, in December 2015, FCA substantiated the best month of sales in the

US and according to latest reports, and those results were considered

untrustworthy and inaccurate. Furthermore, at the beginning of 2017 EPA

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accused FCA of using software that allowed 100 thousand vehicles, SUV sold

from 2014 in US, to exceed emission standards. However, FCA rejected the

accusations calling itself “in good standing and ready to collaborate”.

In 2016, another investigation started against General Motors about emissions

from the Chevy Cruze diesels in the US. As Volkswagen case, also GM was

accused that they launched an engine emitting - but hiding - excessive NOx

emissions. According to the Seattle based law firm of Hagens Berman Sobol

Shapiro, GM’s diesel factory used emissions-cheating software just as

Volkswagen did, delivering more than allowed NOx to escape the tailpipe. This

lawsuit asked GM to pay all Cruze Diesel owners back the $2,000 premium they

paid for their cars as well as more for punitive damages.

Another investigation started, in France, against Renault where the implicated

sectors were engines approval and control; this investigation is very similar to

Volkswagen scandal inquiry.

The Dieselgate scandal itself is the extreme representation of the situation in

Europe, where automakers exploit the lack in the regulatory framework to adopt

illegal practices, which are becoming “best practices” among automotive

companies. The immediate consequence is that the EU ability to enforce emission

standards law is going to fail.

To explain this causal chain of events is important to analyze two policy variables

and their role in EU’s failure to implement real world automotive emissions

target:

1) EU Regulatory Design of command and control (CAC) policies arranged in

the EU automotive industry, classified as general regulatory instruments.

2) Policy interaction between EU CAC policies and EU member state market

based instruments (MBIs), incentivizing, especially, low diesel emissions.

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CAC policies are guidelines that compel producers to modify their behavior,

although MBIs give financial incentives to private companies and consumers in

exchange for changes in their behavior, for example tax reductions, exemptions

and bonus payments.

The EU regulatory framework is less rigorous, in terms of respectability, than in

the US and Japan regarding NOx emissions and it is the main reason why Europe

is the lead market for diesel automobiles and diesel technology development.

Moreover, the EU guidelines are more flexible in terms of companies’

compliance regarding emission standards and the time horizon for compliance to

be met. The regulatory framework shows some faults that create the inefficient

system that Dieselgate expressed to the entire world and lax regulation combined

with lack of policy interaction have lead to this situation.

Dieselgate shows clearly how automakers have actively exploited the fault in the

testing procedures, or the flexibilities, to their sole benefit. Political interests are

the main drivers of the lack in policy interaction among EU, and actually the most

important reason of national economic incentives.

The preferential conduct towards diesel vehicles, thanks to incentives, such as

under taxation, produced a market pull effect and increased their popularity

throughout Western Europe. The outcome was that, at EU legal perspective, car-

manufacturers produced vehicles expanding real-world emissions gaps. At the

national level, there was a huge increase in demand for these kind of vehicles,

which created a lock-in effect to a suboptimal technology.

The fault in the regulatory framework pave the way to new eventualities of the

regulation.

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In Europe the European Parliament has approved the recommendations voted in

the first Emis (Emission Measurements in the Automotive Sector) commission,

which has examined from autumn (but with insufficient influence) the

Dieselgate.

Recommendations mainly require:

3) A quick adoption of the regulations about Real driving emissions (Rde), with

the implementation of unpredictable challenges in homologation tests in order

to detect illegal devices.

4) That Commission proposes a EU collective complaint system and

compensations for car owners

The European Parliament approved the new homologation proposals anti-

Dieselgate, they expect:

4) Intensification of on road supervision and that the national authorities will

be obliged to verify the previous year almost the 20% of inserted vehicles

into the market.

5) Commission would have more power to introduce greater supervision

when national authorities do not respect homologation commitments and,

in some cases, it can implement itself tests and inspections to the vehicles.

6) Car manufacturers that cheat on test results would be subjected to

sanctions until 30.000 euro each vehicle and the consequent earnings will

be used for the market monitoring, consumers damaged or for the

environment safeguard.

The first solution to adopt in order to change the inefficiencies of the EU legal

framework should be immediately solving all flexibilities during future test

cycles. To apply this legal procedure, the only obstacle is the member states

hesitancy; in fact, as known, some of them have special interests, as

shareholdings in their domestic auto companies (i.e. France owns 15,01% of

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Renault shares), which could create difficulties in approving such revisions in the

regulation.

In US the situation is quite different compared to EU.

EPA and the National Highway Traffic Safety Administration (NHTSA)

developed together, in the immediate future: fuel economy standards for light-

duty vehicles (in particular trucks and passenger cars) and the national program

for greenhouse gas emissions (GHG).

However, if the current situation in Europe is not clear and surely is not in an

advanced projection, in US it is precarious. In fact, a wide share of EPA’s

programs could be under the knife to meet President Donald Trump’s budget

proposals requirements, as several sources report, and as the designation of Scott

Pruitt, as head of EPA, could implicate. Trump’s campaign in favor of petrol

industries and military enforcement will cause, probably, for EPA, a budget cut

of 25%, costing about 3000 jobs loss. This program could hidden EPA’s most

important and best-known plans, as initiative to improve water and air quality, as

well as many regulations aimed to reduce nation’s greenhouse emissions (Clean

Air Act).

The new warning-sign arisen in US could hinders the important changes that

automotive industry needs for improving next generations well-being. US is very

influential into European dynamics and this new political ideology, that is

spreading in US, could slow down or even stop the possible changes into the

regulatory framework even in Europe.

After these considerations regard the new perspectives in the regulatory

framework, the analysis continues with the future prospects of Volkswagen and

what the company has to think about to rebuild its image and maintain costumers’

loyalty.

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New regulations about diesel vehicles lead to an increase of production costs for

car manufacturers that could affect their plan in the launch of new models.

The new wind is demonstrated by declarations of political figures throughout

Europe. In Paris, for instance, the mayor affirmed that within five years diesel

vehicles will be banned to reach the programmed green plan of the city.

Moreover, in other European countries it has been formalizing the cancellation

of incentives for diesel vehicles. The pronouncements emerged from the

European Parliament Committee exhibited the agreement to reformulate and

improve guidelines on automobile’s pollution limit and fines. The statement is

important especially concerning the behavior of consumers, they maybe are

motivated to buy eco-friendly vehicles, and this is an important aspect to consider

in future projection for automobile companies. Volkswagen decided, during its

plan to recover its brand image, to concentrate its production efforts toward the

development of new technologies. The company opted to renovate its over-used

diesel control system for newest models, and in the meantime, focusing on the

production of electric and hybrid vehicles.

Dieselgate creates a need to change for Volkswagen and, in order to recover its

credibility, during the analysis are proposed some advices for the company, such

as: develop Leadership with Emotional Intelligence Flexibility (creating a

network with employees through honesty, empathy, tolerance and cooperation),

inject Outside Perspectives and monitors (acceptance of external proposals and

ideas) and be Aware of a Competency Trap.

Dieselgate creates new opportunities in the automotive industry and the most

important car manufacturers in the world have to rethink their business plans.

New regulations, but especially changing customer needs and expectations, are

driving the growth of electric vehicles into the market, but much of this

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excitement can be tracked back to Tesla Motors. Introduction of subsidies to buy

electric cars could increase this trend and create a new path to follow.

Those needs to shift toward electric vehicles is also driven by the importance to

meet the Paris Agreement’s long term goal of keeping the increase in global

average temperature below 2°C. The shift towards implementing them appears

to be slow going. Last news from G7 reported that US President Donald Trump

declared US exclusion from the Paris Agreement and consequently their

dismissal from the low greenhouse emissions fulfillment. The statement is

important in the argument against illegal behaviors, indeed, it demonstrates as

sometimes financial interests make people blind, and negative past-experiences,

as Dieselgate, are forgotten, laying the foundation for a future, new scandal.